How to Interpret Traders Index (TRIN)

         The Traders Index (TRIN) is a quotient of the AD ratio and the AD volume ratio. The value is below 1 when the AD Volume Ratio is greater than the AD Ratio, and vice versa.  Generally speaking, if a strong market gain is spurred by real buying from investors and traders, this should be associated with more advancing volume compared to declining volume. This usually leads to lower AD Volume Ratio by increasing the denominator. Thus, the reading for TRIN will be below 1.  In general, the TRIN moves inversely to the general market. 

If you track TRIN closely, it is not hard to spot that a vigorous uprising market tends to drive TRIN lower, but on a brutal sliding day, the TRIN will be surging!  Hence, a value range of TRIN indicates the market sentiment bullish, bearish, or neutral. 

Sometimes, if the general market goes up moderately to very high, but the TRIN was greater than 1, which is the central line, it might raise the red flag for the general market.

Chart 1: TRIN from 2/1/2013 to 8/5/2013.
Source: Line Graph Outline form stockchars.com.  Actual data compiled by Authors

           From chart 1, you will notice that the TRIN fluctuates around the trend line 1.  Most of the readings are ranging between 0.5 and 1.2.  However, it can go to extremes periodically.

Generally speaking, when the TRIN swings to extremes (lower than 0.5 or higher than 1.2), it can work better as a momentum indicator.  The TRIN index advances briskly when the market is bleeding, and everybody is throwing in the towel.

On the other hand, it dwindles to its most depressed level when the market is ignited by buying mania.  Therefore, the TRIN is most effective when signaling counter-trends, i.e. overbought in the downward market, and oversold in the uptrend market.  It does not work well in the ranging bound market. 

However, the TRIN is not necessarily able to call every bottom or top of the market when this index enters extreme status. This extreme status could continue for a while, like other contrary indicators, especially in an exuberant or a destructive market. 

Credited to http://stockcharts.com/help/doku.php?id=chart_school:technical_indicators:trin