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Trin an Important Stock Market Trading Tool to determine Trend

Posted By On 6/17/2009 01:15:00 PM Under ,

1. Trin or Arms index is a trading tool which was developed by Richard Arms and is a contrarian indicator which helps one to get to know the overbought and oversold levels in the market. One imporant point to note is that TRIN has an inverse relationship i.e. rising TRIN is bearish and a falling TRIN is bullish. One can use this indicator to determine extreme conditions in the market. One can say that market is overbought when 10 DMA (Day moving average) of the TRIN declines below .8 and oversold when it moves above 1.2. However one has to note that in momentum driven markets, the TRIN can remain oversold or overbought for extended periods of time.

2. One can calculate the TRIN by using the below formula i.e. advance/decline ratio divided by the advance volume/decline volume ratio. A TRIN above 1 indicates that the volume in declining stocks outpaced the volume in advancing stocks and TRIN below 1 indicates that the volume in advancing stocks is healthy and is outpacing the volume in declining stocks.

3. Another interpretation which can be tested for Trin in bear markets can be taken as stated below:
(a) Bearish Trin in Bear markets be taken as bullish.
(b) Bullish Trin in Bear Markets be taken as bearish.

4. I found an interesting reading on the way of reading the Trin and same is posted for the benefit of all
(a) One need not to worry regarding the current reading of Trinas it has corelation.
(b) A reading of 1.5 might seem bearish, but if the reading of the day started near 2.0 and we are now an hour into the trading day and 1.50 is the low, this is bullish. This means that volume is flowing into advancing issues and that there is a sustained buying pressure in markets.
(c) Conversely a reading of 0.85 might seems bullish, but if the reading started the day at 0.45 and we are now an hour into 0.85 is the high this is bearish. This means that volumes are flowing into declining issues and there is a sustained selling pressure in the markets.
(d) One has to note that it requires experience to use the Trin and valuable experience is posted here
(i) If the trin reading is trending higher and making higher highs on the day; than ignore all the long setups.
(ii) If the trin reading is trending lower and making lower lows on the day
I will ignore all the short setups
(e) Historical 10 day SMA of trin values indicates that anything above 1.5-2 indicates Heavily oversold levels where bounce back is possible towards 1. When 10 day SMA of trin starts dipping from such oversold levels we can safely assume that short covering gonna take place.

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