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The Traders Index (TRIN)

Continuing with our series on indicators TRIN is one of the best stock market indicators I know of.  It can be used to gauge when major rallies or declines are ready to reverse.  This important indicator measures the intensity of optimism from the dominant market group whether it is the Bulls or Bears.  Excessive optimism from either group can be associated with market tops or bottoms.  In other words if Bulls are optimistic that the market will go up this is reflected in a lower TRIN reading.  

 This means that TRIN moves inversely to the market.  A low TRIN indicates that the Bulls are getting overly bullish; the rally is over done and is near a top.  The lower the TRIN reading is the higher the chance of a market reversal.  You would consider closing your long positions on this signal.  Just the opposite holds true for the Bears.  A high TRIN indicates that Bears are overly optimistic.  When Bears are optimistic that the market will go down then the TRIN reading will be high because too much volume goes into the declining stocks.  This signals the market is nearing a bottom and you would consider covering your short positions.    

 TRIN is calculated using the number of advancing and declining stocks and the volume in both groups.  TRIN compares the relationship between the ratio of advancing and declining stocks with the ratio of advancing and declining volume.  TRIN will fall when the volume of advancing stocks is disproportionately high compared to the number of advancing stocks.  TRIN will rise when the volume in declining stocks is disproportionately high to the number of declining stocks.  

 TRIN can change sharply from day to day and it is best smoothed by using an average like the 13 EMA.  This will filter out the daily swings and give you a more accurate trading signal. 

 TRIN gives its strongest signals when there is a divergence between TRIN and price. 
When the market rises but TRIN traces a lower peak it is signaling the Bulls are running out of steam.  A bearish divergence between TRIN and price is a strong sell signal.  Just the opposite when markets fall. 

 The herd is emotional and short term oriented.  When they act on their feelings buying or selling gets over done in either direction.  When this happens TRIN will signal when a reversal is near.  Most of the time it is after the last of the herd sells the bottom or buys the top.  Has this ever happened to you Just when you can not take your stock going down any more and you finally sell it the stock then reverses and moves up.  It has happened to all of us but now that you know about TRIN this may help you from selling at the exact bottom or buying the top in the rush to get in that hot stock at any price.

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