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Do You Trade The Trin?

The TRIN was developed in 1967 by Richard Arms and is commonly referred to as the Arms Index. It is a widely used index among institutional traders, and used less by individual traders. This can be attributed to the difficult nature of interpreting the indicator, as it contrarian by nature. The TRIN has its roots in the analysis of volume, or the breadth of the market. Mathematically it looks like:

Arms Index = (# of advancing issues / # of declining issues) / (advancing volume/declining volume)

It is intuitively obvious from the formula that up and down volume as it relates to share volume is the basis for its calculation. Like all indicators a smoothing number of periods is added to give the indicator meaning. For short-term traders and swing traders periods of 4 or 5 days are typically used, but longer term traders use period basis as high as 55. In my experience, it takes a good bit experimentation with the TRIN to find the number of periods that best suits your trading style. As an intraday trader, I seldom use periods over 5, sometimes 5. Many traders graph the TRIN, but my experience is that most traders park it in the upper left hand corner and show it as a simple ratio.

The TRIN has never been an oscillator traders use as a primary indicator, but more as a broader indicator in the package of indicator used to evaluate market conditions. A reading of 1.0 on the TRIN is considered neutral and the market is considered to be in equalibrium. Any reading beneath 1.0 is considered to be a bullish indicator, and conversely, any reading above 1.0 is considered to be bearing. I suppose the real value of the TRIN is to give a trader a quick reading on how the market is actually performing. Another popular interpretation of the Arms indicator relates to its ability to predict overbought and oversold levels. If the level is below 1.0 the market is considered to be oversold and the corollary interpretation applies to readings on the indicator over 1.0 as being overbought. In my opinion, the difference in the interpretations is merely a semantic difference, but there are traders that will argue till they are blue in the face there is a definite difference in bullish and bearish vs overbought and oversold. The primary argument centers around the time period indication of the indicator, as the bullish and bearish camp would argue their interpretation indicates buying and selling opportunities.

As I mentioned earlier, I would be hesitant to trade the TRIN as a primary indicator because it suffers, as all oscillators do, as a lagging indicator and therefore requires support from other market indicators to truly be valuable. On the other hand, it lends genuine credence to a bullish or bearish trend when used in conjunction with a primary indicator.

One important distinction to note, and it is a mistake I have seen made, is the inverse relationship the TRIN shares with its cousin the TICK indicator, which are often used together. It is important to note that a rising tick indicates a bullish sentiment, while a rising TRIN indicates a bearish sentiment. In a set up using these indicators, then, the TICK and the TRIN would be moving in opposite directions. Of course, divergences (as they always are) from this primary relationship are of great interest to traders and indicate dangerous trading opportunities.

It is important to note that while the TICK indicates the ratio of rising and falling issues, the TRIN is adept at indicating the volume flowing into rising vs falling issues. This distinction is important to note as it indicate two very different monetary relationships. The TICK tells us the ratio of rising vs falling issues while the TRIN differentiates the volume of money flowing into rising and falling issues.

Finally, I would caution most traders to spend some time with the volume studies popularized by Richard Arms, especially his EquiVolume system before diving headlong into the use of these indicators, as the relationship between the two can be difficult to trade without the proper study and trading. On the other hand, once these two indicators are fully understood they can be pure gold in analyzing a market and discerning real trading opportunities.

In summary we have defined the nature of the TRIN, or Arms index, and noted that it moves in a contrary fashion than most indicators. Further, a reading of 1.0 indicates a market that is neutral or in relative equilibrium. On the other hand, readings below 1.0 are indicative of a bullish market sentiment, and readings above 1.0 are indicative of bearish sentiment. Many traders substitute the terms oversold and overbought, respectively, for these conditions and consider the reading genuine buying opportunities. It is important to remember the the TICK and TRIN, both Richard Arms indicators move in opposite directions in a trend, not the same direction.


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