How to Avoid False Breakouts with TRIN

Focus: STRATEGIES

Ken Calhoun Image Ken Calhoun President, TradeMastery.com

Ken Calhoun, founder of Daytrading University, explains how to interpret the TRIN indicator to avoid buying stocks that look to be breaking out but fail to actually make a move higher.

In this article, we'll be looking at the Arms Index (TRIN), developed by Henry Arms. It's a very useful breadth indicator used by momentum breakout traders and is calculated each day as:

TRIN = (Advancing issues/Declining issues) / (Volume of advancing issues/Volume of declining issues)

The TRIN updates every minute and is excellent for trading discipline. When it's "short biased," one should avoid trading to the long side in order to avoid entering false breakouts. Long breakouts in any equity are made only when the TRIN is favorable, or "long biased," for trading entries.

Placing your trades in context of the TRIN can help potentially avoid entering false breakouts. There are two TRINs, one for the Nasdaq ($TRINQ) and one for the NYSE ($TRIN).

Using the Arms Index (TRIN) to Find Directional Market Bias
The TRIN is an inverse indicator, meaning it goes down in value when the market rises (like the VIX). In Figure 1 (two TRINs), you can see that for this particular trading day, January 31, 2012, the market had been selling off. The two TRIN indicators are, therefore, over 1.0, indicating a "short-bias" market.

chart
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Note that the two TRIN values will always be different.