Trading What I See

Watching the overall market, the number of advancing and declining stocks, the rise and fall of sectors, and what is happening to volume is all a part of understanding the context of your trades. Although most traders can see the importance of this information, setting up a structure that is easy to use can be intimidating. I’ll be out of town the day before and after Thanksgiving, so I’ll use this opportunity to show how I track the rest of the market. I’ll start by talking about TRIN.

I have the actual numbers for the NYSE advances and decline, as well as up and down volume figures, showing on one of my monitors all the time (image on left.) But one key element of my trading requires that all my basic information can be interpreted at a glance, and the raw numbers don’t do that job.

Richard Arms came up with one solution in 1967. It is the ARMS index, but more people probably know it by the name TRIN, or the Short Term Trading Index. It is an attempt to measure the amount of volume going into advancing and declining stocks by combining their ratios into a single index. The number of advancing stocks is divided by the declining stocks to get their ratio. The same is done with advancing and declining volume. Then the first ratio is divided by the second to get TRIN.

According to Gerald Appel’s Winning Market Systems

This is a quite sensitive indicator and frequently changes direction moments in advance of market turnarounds on an intra-day basis. It is usuful in trading operations but its extreme sensitivity does result in false signals and fosters emotional activity.

He goes on to say that, in its raw form, the best use is to time the exact moment for pre-planned entries or exits in the market - not as a signal in itself.

There are many ways to use TRIN, and the most simplistic don’t work very well. You’ll find it written that a number less than 1.0 is bullish and over 1.0 is bearish. As a very general observation, this is true, but it is actually the direction (or change of direction) of TRIN that is most important to traders. And that leads to a visual problem, that in turn can lead to mistakes in a fast market.

When the market is rising, the TRIN tends to be falling. When you chart the TRIN under the market, a falling TRIN is bullish, and a rising TRIN is bearish. In one of his columns Dick Arms said that if he had it to do over, he would have turned the Arms Index upside down to make it easier to read. Of course, after almost 40 years, no one is going to change the actual numbers.

But with a computer you can reverse the direction of the numbers yourself. Because the indicator is so sensitive, many traders slow down the action of the TRIN, usually with some type of moving average. I use a modified MACD on the raw TRIN, and in the process, I flip it upside down.

The MACD (created by Gerald Appel - that’s his quote above) uses three moving averages to create a momentum oscillator. But by putting the numbers in backwards, you can reverse the direction of the oscillator. This way I accomplish two things — I slow the TRIN down to a level that matches my trading, and when my indicator goes up, so does the market.

The normal numbers for an MACD are 12, 26, and 9 — all exponential moving averages. The second moving average is subtracted from the first to give the MACD. Then you create a moving average of that result (using the third number) to create a trigger line. And if you want to reverse the direction of the oscillator, just reverse the order of the first two numbers.

Experiment with the input numbers to come up with a TRIN oscillator that matches your trading style. At the present time I’m use the Fibonacci numbers 34, 21, and 8 on various timeframes, but the goal is not to match my indicator — it’s to find something useful for you.

A magic indicator? Not at all. This is not even necessarily what your market is doing — it’s just another way of tracking whether your potential trade is riding the general market trend or fighting it. Have a nice Thanksgiving tomorrow, and Friday I’ll show you how I track multiple sectors of the market in real time.

Gerald Appel’s Winning Market Systems: Eighty Three Ways to Beat the Market