Jul 10, 2008

Traders Index: TRIN - Stock Market Strategies

The Traders Index (TRIN for short), developed by Richard W. Arms, is a short-term trading index that offers the day trader and the longterm investor a look at how volume — not time — governs stock price changes. TRIN is a contrarian indicator to detect overbought and oversold levels in the market.

The TRIN Index is designed to measure the relative strength of the volume associated with advancing stocks vs. that of declining stocks. If more volume goes into advancing stocks than declining stocks, the Arms’ Index will fall to a low level under 1.00. Alternatively, if more volume flows into declining stocks than advancing stocks, the Arms Index will rise to a high level over 1.00. The TRIN index for NYSE can be found using here. Similarly TRIN index for NASDAQ & AMEX can be found in Barron's, Wall street journal, CNBC, etc.

The formula for calculating TRIN is:

TRIN = [(Advancing issues/declining issues) / (advancing volume/declining volume)]

How to use TRIN?

1. 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.

2. TRIN is actually most powerful when combined with a reading of NH-NL (new-high new-low Index) as described here. When TRIN becomes oversold and the NH-NL reaches a new low, the downtrend is likely to continue. But if TRIN becomes oversold and NH-NL is bullish, then a low has been reached.

3. Further, if TRIN shifts to overbought but NH-NL hits a new high, the bulls are strong and the uptrend will continue. When TRIN is overbought and NH-NL returns a bearish signal, the stock market top has likely been reached. Feel free to short away!

There are many interpretations for TRIN signals and many conclusions out there. But, I would suggest that you experiment more and derive your conclusions.