Sunday, January 29, 2006

TRIN - Questioning a market internal Index

TRIN also known as the ARMS Index

It’s calculated as

TRIN = Number of advancing issues / Number of decreasing issues

To tell the truth even if I show the TRIN on my FuturesTrader platform right next to the TIKI number, I have never used the TRIN in my trading. Why?

Because this indicator is not linear. To understand the number, you need to think, actually if it’s below 1 you need to think twice what it is telling you. Let’s look at an imaginary market with 10000 individual shares and let’s calculate some TRIN numbers for this market.

Globetrader_185

One objection I have against this indicator is the jump in the numbers once the number of Advancing over declining shares crosses a certain threshold. ADV went from 8000 to 9000 and the index jumped from 4 to 9, even if we all can agree imho, that it makes not a lot of a difference for our trading whether we have a very strong or an even stronger trend. ADV 8000 or 9000 makes no difference, but going from ADV 5000 to ADV 7000, which shows in the trin as a jump in numbers from 1.00 to 2.33 is sure a very interesting change, as this means that first we had a consolidating, most likely flatish market changing into a trend-up market. Still the difference is just 1.33 points in the index, while the unimportant change (ADV 8000 to 9000) actually gave you a 5 point change in the index.

But my main objection is, that your mind will never treat the change from 1.00 to 2.33 equal to the change from 1.00 downto 0.43.

Our minds treat numbers linear and in trading you need to keep it simple. You don’t have a lot of time to contiously think, you need to give a lot of these number interpreting tasks to your subcontious mind and rely on it to tell you, when important thresholds are crossed. Have enough screentime and you know, what I’m talking about.

For me, if I have to interpret an index, I assume that a positive number means prices go up as well, if a number is near 0 it’s a flat market and a negative number tells me to expect prices going down. And to make it really simple please have the bigger numbers tell me that the trend is stronger than when seeing lower numbers (My main problem with the cci btw and the reason why I took me so long to learn it’s patterns).

So is there a simple way to transform the TRIN to conform with these rules without actually changing the TRIN index?
Sure is. You just need to distinguish between 3 conditions:

1. Advancing issues > Declining issues
2. Advancing issues = Declining issues
3. Advancing issues < Declining issues

Rule 1. The TRIN formula remains as is, just substract 1 from the result to shift the TRIN result to 0 instead of 1, when the advancing issues become nearly equal the Declining issues.
Rule 2. If ADV = DEC the result is 0. So calculate the TRIN as is and substract 1 from the result.
Rule 3. Here comes the real change to the formula. Now the TRIN is calculated as:
TRIN = – Declining issues / Advancing issues + 1 (plus 1 to shift the TRIN result from -1 to 0, so we have no jumps in case we chart the TRIN)

And here is the result you get with the new TRIN
Globetrader_186

Now the numbers go from 8 to 0 to -8. (The 9999 result was just added to show you, that the TRIN really is non-linear, you won’t see this in real trading)

I think, that’s something you can easily grasp even with a cursory look at the TRIN, just to confirm that your chart signal is accompagnied by a jump in the TIKI, is really happening with the current market trend and therefore worth taking.

Nice, nice you might think, if you followed me so far. But I trade with IB and IB gives me the TRIN as is, and it does not give me the raw numbers. Fortunatly you don’t need them. Just take the TRIN and let your chartprogram calculate the new number. 
If the TRIN is >1 the formula is:

  • new TRIN =  old TRIN -1

If the TRIN is < 1 the formula is:

  • new TRIN = (1 / old TRIN) + 1

Monday’s FuturesTrader release will have the new TRIN integrated in a new Cockpit like Window.

Globetrader_187

From top to bottom it shows Price, Trades/minute, Total Bid/Ask Trades, TIKI and the new TRIN on analog meters, as I thought, there is a reason why we still use analog meters in our cars to measure velocity or even in the most sophisticated planes to display different flight parameters. And my first week trading with this cockpit has shown me: It makes a difference. You can spot changes a lot faster on an analog meter compared to watching numbers going up or down. If there is enough interest I’m thinking about taking this cockpit and a few other windows from FT and actually offer them as a seperate program for those interested in just this functionality.

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