How to Profit from the Stock Market BY Applying Traders Index (TRIN)

The Traders Index (TRIN) is called the ARMS index as well after its creator Richard Arms’ last name.  It is a breadth indicator which is used to capture and gauge market momentum. 

The quotient from Advancing Issues/Declining Issues usually is called AD ratio. On the other hand the quotient from Advancing Issues/Declining Issues is called AD Volume ratio. 

The 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. 

Traders can often detect if the market goes up, due to short-covering or real buying from Money Makers, by applying TRIN.  If the TRIN is greater than 1, market runs up very fiercely and the ISEE is very low. You must be aware that the market may not be sustainable, since the major institutions might not have participated in the rally.  On the other hand, the rally might have been driven by short-covering or stock buying mainly from retail investors.

Similar to other momentum indicators, the TRIN has the capability to detect short-term overbought and oversold situations, since it functions as an oscillator.  It is frequently monitored by investors and traders, especially momentum and swing traders.

To smooth the TRIN reading, a moving average is applied to accomplish this goal. 

The neutral value range for the TRIN is between 0.5 and 3 based on a 10-day moving average.  If the TRIN goes beyond a reading of 3, the market might enter the overbought condition. Traders could sell short, take profits on long positions, or buy Bear ETFs.  Likewise, if the TRIN drifts below a reading of 0.5, traders become more optimistic about the market and take action accordingly. 

          The market had been in an uptrend direction since November 2012. It was more likely that the market approached overbought than oversold conditions.  It is obvious that this internal strength is sensed in the above chart.  Hence, the TRIN reveals that the overbought status most often creates bullish signals in the gigantic uptrend market. 

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