Like any other day traders, we are always looking for correlation in other markets or indicators to give us an edge. It's not easy when there are lots of data and techniques out there to choose from. Those that are out there simply work in one market but not in others while more work at one type of market condition and not in others and so on.
Scalping and day trading in particular has a peculiar type of behavior where everyone wants to know what the market will do in the next minute or so in order to catch a small tiny profit -- little by little to accumulate with highly leveraged trades. That said, every weapon helps to avoid losses and to add to the higher probability of success. Percentage is everything in this type of trading, the more wins, no matter how tiny, the more chances of survival. Discounting the commissions, which can be up to more than 30% round-trip on each trade (the profits are so tiny compared to fixed fee commissions), so the percentage needs to be high enough to cover them before profits is taken in (not including the taxman's cut as well).
Many stock day traders use the typical broad market indexes to view the sentiment and trend of the markets to gauge the influence they have on the individuals stocks they monitor and trade. This helps see the tendency of the market to swerve one way versus another. Others use index futures such as the S&P 500, Dow and NASDAQ futures (like the e-minis) to gain a tiny milliseconds to see ahead of what others cannot see. In addition to that, futures are the hedging vehicles for the big players such as institutions, hedge funds, mutual funds, pension funds, and so on, so this aids in understanding what the big boys are thinking and doing.
The two most common and popular are the NYSE TICK and TRIN indexes. These two have been around for more than 30 years and still viable in today's market conditions. While the TICK monitors all the NYSE stocks? ticking up versus one ticking down, the TRIN monitors the volume. The TRIN (Trader's Index) is also known as the Arms? Index (named after the creator of the indicator). The formula is:
Advancing Issues/Declining Issues
TRIN = ______________________________________________
Volume of Advancing Issues/Volume of Declining Issues
This indicator separates declining issues from advancing issues and their respective volume and divides them to get a ratio. If the ratio is above 1, then there is there negative downtrend stock sentiment. Below ratio of 1, there is more positive uptrend stock sentiment.
Looking at an example, we'll correlate the indicator with Russell 2000 futures:
caption: Figure 1.
Although being above 1 or below is important, the main consideration is the trend of the line, where it is heading. On February 13, the entire day, the major trend has been from top to bottom, from above 1 to below 1. This indicated the day has been advancing most of the day-- not only number of advancing stocks but also the number of volume of those advancing stocks outnumbered the declining ones and their volume.
caption: Figure 2.
Checking figure 2, the Russell 2000 has been advancing, following the general sentiment of the market: up. This confirms the overall mood of the market and, in turn, helps the trader determine which way the momentum is going and he would go with it. This would increase the probability that the trade will succeed when following the direction of the market and its momentum.
The best moment to enter is the TRIN pulling back; when it turns and heads toward prevailing direction, it is the moment to enter in the stock the trader is watching.
Using this in tandem with the signals from NYSE TICK to confirm market breadth is a powerful combination. It takes some use to understand how the two will provide clear signals to make a precise entry and exits. Like everything else, practice makes perfect.
Scalping and day trading in particular has a peculiar type of behavior where everyone wants to know what the market will do in the next minute or so in order to catch a small tiny profit -- little by little to accumulate with highly leveraged trades. That said, every weapon helps to avoid losses and to add to the higher probability of success. Percentage is everything in this type of trading, the more wins, no matter how tiny, the more chances of survival. Discounting the commissions, which can be up to more than 30% round-trip on each trade (the profits are so tiny compared to fixed fee commissions), so the percentage needs to be high enough to cover them before profits is taken in (not including the taxman's cut as well).
Many stock day traders use the typical broad market indexes to view the sentiment and trend of the markets to gauge the influence they have on the individuals stocks they monitor and trade. This helps see the tendency of the market to swerve one way versus another. Others use index futures such as the S&P 500, Dow and NASDAQ futures (like the e-minis) to gain a tiny milliseconds to see ahead of what others cannot see. In addition to that, futures are the hedging vehicles for the big players such as institutions, hedge funds, mutual funds, pension funds, and so on, so this aids in understanding what the big boys are thinking and doing.
The two most common and popular are the NYSE TICK and TRIN indexes. These two have been around for more than 30 years and still viable in today's market conditions. While the TICK monitors all the NYSE stocks? ticking up versus one ticking down, the TRIN monitors the volume. The TRIN (Trader's Index) is also known as the Arms? Index (named after the creator of the indicator). The formula is:
Advancing Issues/Declining Issues
TRIN = ______________________________________________
Volume of Advancing Issues/Volume of Declining Issues
This indicator separates declining issues from advancing issues and their respective volume and divides them to get a ratio. If the ratio is above 1, then there is there negative downtrend stock sentiment. Below ratio of 1, there is more positive uptrend stock sentiment.
Looking at an example, we'll correlate the indicator with Russell 2000 futures:
caption: Figure 1.
Although being above 1 or below is important, the main consideration is the trend of the line, where it is heading. On February 13, the entire day, the major trend has been from top to bottom, from above 1 to below 1. This indicated the day has been advancing most of the day-- not only number of advancing stocks but also the number of volume of those advancing stocks outnumbered the declining ones and their volume.
caption: Figure 2.
Checking figure 2, the Russell 2000 has been advancing, following the general sentiment of the market: up. This confirms the overall mood of the market and, in turn, helps the trader determine which way the momentum is going and he would go with it. This would increase the probability that the trade will succeed when following the direction of the market and its momentum.
The best moment to enter is the TRIN pulling back; when it turns and heads toward prevailing direction, it is the moment to enter in the stock the trader is watching.
Using this in tandem with the signals from NYSE TICK to confirm market breadth is a powerful combination. It takes some use to understand how the two will provide clear signals to make a precise entry and exits. Like everything else, practice makes perfect.
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