TRIN stands for TRaders’ INdex and was developed by Richard Arms in 1989 (it’s also referred to as the Arms Index). Its main purpose is for detecting overbought and oversold levels in the markets.
The Trin is expressed:
# of advancing stocks / # of declining stocks divided by
volume of advancing stocks / volume of declining stocks
The resulting Trin # is inverse to the market (a + reading is bearish, a – reading is bullish). A ratio of 1.0 means the market is at parity. A reading of 2.0 means much more volume is flowing into declining stocks. A reading of below 0.6 means much more volume is flowing into advancing stocks.
With the introduction of inverse ETFs the Trin has lost some of its appeal to intraday traders.
John Carter talks about the Trin in his book Mastering the Trade and has this to say…
If the Trin closes below 0.6, the market has an 80% chance of selling off the next day.
If the Trin closes above 2.0, the market has an 80% chance of rallying the next day.
If after closing above 2.0 the markets can’t rally the next day, a major sell off could be in store.
To the right we have the daily closing value of the Trin. It is typical to see a close above 2.0 followed by a close below 1.0 as John Carter talks about above. I mainly look at the Trin on a daily time frame to note irregularities or failures to rally after large down days.