Page 226 - THE MARKET WHISPERER

222 PART 7 - Indicators: The Trader’s Compass

be after the letters. We display the TRIN indicator in five-minute intraday
candles.

The premise behind the TRIN indicator is that we should not relate
only to market direction. For example, imagine a situation in which the
market is rising on low volume, but more and more trades are actually
being executed for dropping stocks. In other words, the rising stocks
show no buyer enthusiasm compared to stocks that are dropping in
high volumes. This state indicates there is no change of direction at that
particular moment, since the quantity of rising stocks is still higher than
the quantity of dropping stocks, but the rise in trade volumes of dropping
stocks definitely seems to indicate an approaching pattern reversal.

The TRIN examines trade volumes of stocks on the NYSE and is an
extremely useful intraday tool for the short term. The fact that it represents
only stocks traded in the New York Stock Exchange is of no significance,
since these stocks represent the overall market. In other words, if you are
trading a stock linked to the NASDAQ, there is no need for concern: the
indicator also represents the anticipated behavior of your stock.

Below is an explanation of the formula by which the TRIN is calculated:

Volume of trade of falling stocks
TRIN = ---------------------------------------------------------

Volume of trade of rising stocks

Analyzing the components of this formula, we understand that:
• When the TRIN is greater than 1, it means that the trading volume of

dropping stocks is higher than the trading volume of rising stocks. In

this case, the risk of purchasing the stock is greater, and conversely, the

chances of succeeding with a short are also greater.
• When the TRIN is less than 1, it means that the trading volume of rising

stocks is higher than the trading volume of dropping stocks. In this case,

the risk in short selling is greater, and on the other hand, the chances

are better for buyers.

In most cases, when you look at the TRIN indicator in a dropping market,
the TRIN will be above 1, and in extreme cases, around 3 or 4. When the
market rises, the TRIN will be less than 1 and in extreme cases, around 0.3.

Mathematically, the outcome of the formula can never be less than zero.