TRIN is one of my favorite mechanisms for filtering losing stock trades. This powerful indicator keeps me on the right side of the market for most of the trades I make.
I have found that between 30% and 50% of the outcome of any stock trade can be attributed to what the stock market in general is doing at the time you enter a trade. I am specifically referring to stocks on the New York Stock Exchange when I mention the market in general. Trading against the supply and demand dynamics of the New York Stock Exchange is one of the main reasons most stock trades fail. In fact, if you can determine if there is a supply-side imbalance or a demand-side imbalance, you will be able to answer the most important question of whether you should go long or short at a particular time during the day.
By far the TRIN is the most important inside market indicator that I use when deciding whether to go long or short. The TRIN stands for Short Term Trading Index or Arms Index, and is named after noted market technician Richard Arms. Released in 1967, this old but good indicator has been time tested and is not called a trading index for nothing. The TRIN index measures the pure supply and demand that exists in the market and tells you whether buying pressure or selling pressure is really controlling the market. As a result, it can reveal underlying pressures that are simply not apparent just by looking at price.
So how exactly is TRIN used in live trading? It really is as simple as applying the following rules:
1. If TRIN is above 1.00 and sloping, sellers control the market and you should try to short.
2. If TRIN is below 1.00 and declining, then buyers control the market and you should try to go long.
There are even more advanced ways to use it that will further increase your profitability. I highly recommend that you experiment with TRIN for your own trading. Review your past losing day trades to see if applying the above TRIN rules to your trades would have improved performance.