Using TRIN for Intraday Trading
What is the TRIN?
Richard Arms developed Arms index, which is better known as the NYSE Short Term Trading Index. The indicator is used in a contrarian manner to detect overbought and oversold levels. The indicators calculation creates an inverse relationship with the market.
In the most basic analysis, a rising TRIN is bearish and a falling TRIN is bullish.
To calculate the TRIN, you take the advance/decline ratio and divide by the advance volume/decline volume ratio:
((Advancing issues/declining issues) / (advancing volume/declining volume))
Examples of TRIN calculations:
In the first example, the ratios were equal and the TRIN was 1, which indicates a neutral reading. The volume flowing into advancing stocks equals the volume flowing into declining stocks. In the second example, the up volume/down volume ratio did not keep up with the advance/decline ratio and the TRIN rose above 1. A TRIN above 1 indicates that the volume in declining stocks outpaced the volume in advancing stocks. In the final example the TRIN was below 1, indicating the volume in advancing stocks was healthy and outpaced the volume in declining stocks.
The way I use the TRIN is much more dynamic than the description above. TRIN readings must be taken into context with other breadth indicators. Moreover, a traders feel for underlying market psychology is critical in determining where the “extreme” readings are. After a significant multi-day sell off, a TRIN reading can get as high as 7.0 or even higher. This indicates extreme panic. However, in a more controlled decline, a TRIN reading of 1.8 or 2.10 can indicate the market is temporarily sold out.
Conversely, when the market is down several hundred points but the TRIN is flashing 0.55 for example, indicates institutional buying into weakness. This generally results in a rally the following day, or much later in the day.
My advice is to monitor this indicator for several weeks. Overlay a chart of the SPX on your TRIN chart to observe how the market behaves around certain TRIN levels. Never use the TRIN as your absolute logic behind a trade. It should serve as a speed bump. For example, if the market is trying to bottom out from a steep sell-off, but TRIN remains stubborn with a reading between 1.25 to 1.35, then it should serve as a red light from taking any long positions. To give the trader a green light in this situation, you would want to see an extreme reading above 2.0.
On the other side of the equation, if the market has been in a sustained rally, and the TRIN is close to 1.0, the rally remains healthy. However, if the TRIN reads .55 or lower, it indicates extreme optimism and calls for a likely reversal, or at least a halt to the rally.
A number of TRIN interpretations have evolved over the years. Richard Arms, the originator, uses the TRIN to detect extreme conditions in the market. He considers the market to be overbought when the 10-day moving average of the TRIN declines below .8 and oversold when it moves above 1.2. Other interpretations seek to use the direction and absolute level of the TRIN to determine bullish and bearish scenarios. In the momentum driven markets, the TRIN can remain oversold or overbought for
extended periods of time.
