If you ask stock trading experts how they make their buying, selling or holding decisions, they will often tell you that they rely on a lot of technical data, financial charts and different indicators. These facts enable traders to monitor the various stock market trends, the changes in stock momentum and stock prices. One such indicator that traders rely upon is known as the TRIN indicator. Here’s a detailed guide on TRIN.

What is the TRIN stock market indicator?

The Short-Term Trading Index or TRIN is a technical analysis indicator invented by Richard W. Arms Jr. in 1967. Also referred to as the Arms Index, this indicator compares the advancing and declining stocks numbers (known as AD ratio) to the advancing and decline volumes (known as AD volume). The indicator is used to measure the overall market sentiment. It gauges the relationship between supply and demand in the market and also serves as an efficient predictor of movement of prices in the market, in future; fundamentally on an intraday basis. The indicator predicts future price movements by generating the oversold and overbought levels, which, in turn, indicates the time when the stock index, along with the majority of stock in it, will change direction.

Calculating the TRIN indicator

The Formula

TRIN  = Advancing Stocks/Declining Stocks
Advancing Volume/Declining Volume

 In the above formula:

Advancing Stocks = the number of stocks which are higher on the trading day

Declining Stocks = the number of shares which are lower on the trading day

Advancing Volume = the total volume of all the advancing stocks

Declining Volume = the total volume of all the declining stocks

Steps to calculate the TRIN indicator

You can find TRIN in several different chart applications. It can also be calculated manually. Follow these steps to calculate the TRIN stock market indicator manually.

1. At different, predetermined intervals (which could be every few minutes or hours) you need to find the AD ratio. This can be done by dividing the advancing stock numbers by the declining stock numbers.

2. As is apparent through the formula, the next step to calculate the arms index is to divide the total advancing volume by the total declining volume to arrive at the AD Volume.

3. Now, you have to follow the third division step, i.e. you need to divide AD the AD ratio by the AD volume

4. You can now record the result on a graph

You can repeat the same steps as mentioned above, and calculate the TRIN indicator ratio during the next chosen interval. If you connect the multiple data points and form a graph, you will be able to see the movement of TRIN over time.

TRIN Index Analysis

The arms index attempts to offer a rather dynamic explanation of the overall movements in the combined value of the stock exchanges – the BSE and NSE, for instance. It analyses the breadth and strength of these movements. Here are some points on how the arms index TRIN may be analysed.

1. If you see an index value of 1.0, it is an indicator that the AD volume ratio is equal to the AD. When the index value equals to 1.0, the market is deemed neutral, since the up volume is distributed evenly over any advancing issues. The down volume is also evenly distributed over all declining issues.

2. As per expert analysts, the arms indexindicates a bullish signal when it is less than 1.0.  This is because there is a higher volume in the average up-stock than in the average down-stock. Analysts also say that the long-term equilibrium for this index is below the 1.0 mark, which potentially confirms the fact that the stock market has a bullish bias.

3. Conversely, a reading that is greater than 1.0 is considered a bearish signal. In this case, there is a higher volume in the average down-stock than the up-stock.

4. The contrast between purchasing and selling securities on a given day increases with how further away the TRIN indicator value is from 1.0. If the value exceeds 3.00, it signifies an oversold market, while also indicating an overly dramatic bearish sentiment. This could also suggest that an upward reversal in indices or prices may be expected.

5. If the TRIN value falls below 0.50, it could indicate an overbought market, in which bullish sentiment may be overheating.

Final note:

Traders consider both, the TRIN indicator’s value as well as how it changes all through the day. They also check for extremes in the index value to look for signs indicating changes in the market’s direction. To know more about arms index TRIN, log on to the Angel Broking website.