How to Make a Better TRIN Indicator (6:11)
The TRIN Indicator, also known as the Trading Index or Arms Index, was developed by Richard Arms in 1967 and since then has become one of the best-known indicators of stock market strength. Today, TRIN Indicator data is available for both the NASDAQ and NYSE markets.
The original TRIN Indicator formula
At the time, the idea was revolutionary. By combining four non-price variables in a very simple formula, a single number could be generated that indicated whether market internals were bullish or bearish. The original formula for the TRIN Indicator is as follows:
TRIN = (Advancing Issues / Declining Issues)
(Advancing Volume / Declining Volume)
Where “Issues” refers to the number of stocks rising or declining in price; and “Volume” refers to the total volume traded of rising or declining stocks.
Problems with the TRIN Indicator
TRIN Indicator Raw Data on an End of Day Chart
A chart of the raw NYSE TRIN Indicator data is shown above. As revolutionary as the TRIN Indicator was, there are some problems with it:
Problem #1: The TRIN Indicator is not an intuitive value.
Values above 1 indicate that there is selling in the market. Values less than 1 point toward more buying activity. For greater clarity, a high number should mean that the market is advancing; a low number would indicate that the market is in decline.
Problem #2: The TRIN Indicator makes market data look unbalanced.
If stocks are bought and sold at equal rates, the TRIN Indicator value is 1. But after a day of heavy selling, the TRIN could be as high as 3. Similarly, the TRIN could dip to 0.3 after a day of heavy buying. When charted over time, the result is a graph with high spikes but shallow dips. See the chart above.
Problem #3: When averaged, TRIN data provides an inaccurate picture of the market.
Traditionally, traders average the TRIN Indicator data over 10 days. Any value under 0.8 represents an overbought market, while a value of over 1.2 indicates that the market is oversold. But because the data is lopsided to begin with, this average is a faulty calculation at best.
Creating a Better TRIN Indicator
It’s been 40 years since investors first began using the TRIN Indicator as a market measure. Can we do better? Yes! By making some simple mathematical adjustments in your charting software, the result is an adjusted or Better TRIN Indicator that is easier to interpret and more accurate when averaged.
Here’s what to do to create a Better TRIN Indicator:
- Take the Log of the NYSE TRIN value
- Invert this value so negative values are positive and vice versa
- Multiply the inverted Log value by 100, and
- Repeat for the NASDAQ TRIN data and average the two values
Interpreting the Better TRIN Indicator
Better TRIN Indicator with the Emini
The chart above shows what the adjusted or Better TRIN Indicator looks like. Now, the TRIN Indicator makes more sense to me!
If you have successfully followed the steps above, the Better TRIN Indicator is easy to interpret at a glance and gives you a better idea of market trends when averaged.
- Values range between -100 and +100, with 0 as the neutral point.
- Positive values indicate buying and a market in an upswing.
- Negative results indicate selling activity and downward moves in the market.
- Values are balanced, requiring the same amount of buying or selling for the indicator to be +100 or -100 and, therefore, averages are accurate.
Lastly, Richard Arms talks about the history of the TRIN Indicator
Interview with Richard Arms, Inventor of the TRIN Indicator – Jun 2011
And lastly, here’s a great interview with Richard Arms where he talks about how he came up with the TRIN Indicator over 40 years ago.
Around the 1:20 mark he finally admits he should have inverted the TRIN Indicator values to make them more intuitive!
Check out the next article in this series: How to Trade with the Better TRIN Indicator
