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What is The Arms Index (Trin Indicator) and How To Use It? - YouTube
Channel: Earn2Trade
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Greetings traders and welcome back to another
In Depth with Chris episode.
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In today's discussion,
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we will be talking about the Arms Index short for TRIN.
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This is going to be one of the indicators that has been around
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for some time in the stock trading world, but absolutely
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can be applied to other areas of trading as well,
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once you understand what it is.
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We're going to cover exactly what it is how it's calculated
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and how it can be used to help identify potential trading
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scenarios, but before we go further please do me a favor
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and click that like and subscribe button down below,
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so I can keep coming out with videos
for you guys. Without further ado,
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here we go.
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The Arms Index is also known as the short term trading index
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and it is something that has been around for some time.
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It's a short-term technical indicator that is used to compare
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the number of advancing and declining stocks which is referred
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to as the A D Ratio to the advancing and declining volume,
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which is known as the AD Volume.
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It was developed by Richard Arms in 1967.
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TRIN is used to gauge overall market sentiment with the
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TRIN investors can evaluate the relationship between market
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supply and demand and anticipate future intraday price movements
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the TRIN generates overbought and oversold levels that will
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indicate when the stocks are most likely to change direction
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the formula for the TRIN is written here in green.
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Now, this is the formula, but remember the indicator itself
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is going to be doing the math for you.
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I just like to cover these things, too.
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We understand what is actually being calculated and we're
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not just trading blind.
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The TRIN formula is equal to advancing stocks divided by
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the declining stocks divided by the advancing volume divided
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by the declining volume.
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So it's a very simple formula the advancing stocks is equal
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to the number of stocks higher for the day.
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The declining stocks is equal to the number of stocks lower
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for the day.
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The advancing volume is equal to the total.
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Advancing stocks and the declining volume is equal to the
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total volume of declining stocks.
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Although most charts do already include the TRIN indicator,
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the TRIN indicator can be calculated in a few easy steps.
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The first step would be to just choose our intervals.
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That means we set our intervals to whatever we want.
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It could be, say 5 minutes, every hour, daily,
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whatever it is,
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we're interested in measuring. Then, step two would be to divide
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the number of advancing stocks by the number of declining
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stocks to calculate the A D Ratio. Step 3 would be to divide
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the total advancing volume by the total declining volume
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to get the AD Volume. Then, for step four will divide the
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A D Ratio by the AD Volume. After this, step 5 is to simply record
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the result and plot it on the graph. Then we'll repeat the
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same steps over and over with each passing interval.
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When we connect the data points on the graph will see how the
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TRIN trends over time.
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Let's talk about what the Arms Index tells us.
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Well by analyzing both the strength and the breadth of the
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stock movements.
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The Arms Index gives us a real-time explanation of the overall
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movements in the market indexes themselves. A value of 1.0
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for example, indicates that the market is in a neutral state.
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Why might you ask?
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Well, that's because a value of 1.0 means that
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the A D Ratio is equal to the ad volume.
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And that up volume is evenly distributed over advancing stocks
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while down volume is evenly distributed over the declining
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stocks. The TRIN indicator provides a bullish signal when
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it is less than 1.0 and a bearish signal when it is greater
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than 1.0. When the level is less than 1.0
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that means there is a greater volume in the average up stock
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than the average down stock. When the level is greater than
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1.0 that means there is a greater volume in the average down sock,
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than the average up stock. The further from 1.0 that the TRIN
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indicator's value is the greater the contrast between buying
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and selling on that day or interval. A strong update for example
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will push the TRIN down while a strong down day will push
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the TRIN upwards.
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The TRIN is a breadth oscillator that helps measure the
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internal market strength or weakness.
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It is a short term technical trading tool that measures volatility
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in the stock market and as such represents the relationship
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between advancing and declining stocks over volume,
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like we said. If the TRIN is trending upwards that means
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the market is weaker,
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whereas if the TRIN is trending downwards that means the
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market is stronger. The TRIN often moves inversely to the
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index when it's being analyzed. When the TRIN spikes higher,
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sell-offs usually occur. When the TRIN drops sharply rallies
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usually occur. Often traders will include a moving average
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on the index one evaluating the TRIN. By analyzing the moving
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average the data can be smooth out while giving investors
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a better understanding of whether or not the trend is going
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up or down. The moving average also aids in identifying support
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and resistance areas as well.
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Finding overbought and oversold levels and major indexes
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is one of the main goals of the TRIN.
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We already mentioned that 1.0 is the neutral value and that
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the TRIN moves inversely to an analyze index. Very high or
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low readings in the TRIN indicator may signal that the levels
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are either overbought or oversold and due for a reversal.
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While overbought and oversold levels may vary slightly by
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the index being analyzed, the TRIN can always tip us off.
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When the value of the trend indicator dips below.
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That may indicate overheating and an overbought market. When
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the value of the trend indicator exceeds 3.0 that may indicate
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an oversold market with an extreme over bearish sentiment.
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While the TRIN indicator isn't always correct,
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it is very valuable and it helps tip off these moves to us
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as investors prior to a dramatic price shift or potential
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reversal. When trading with the TRIN indicator it is especially
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helpful when day trading or swing training. Traders look at
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the value of the indicator and how it changes throughout the day.
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They also like to look for extremes in the index value and
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are always looking for signs of that the market may soon
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reverse whatever it is currently doing. When using the TRIN
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indicator the best thing to do is to combine it with other
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indicators or outside price knowledge to further confirm
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the read. It is always important to combine the use of outside
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knowledge with the TRIN indicator as it is with just about
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any other indicator out there some good combinations would
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be Bollinger Bands, for example, to help us avoid some miscalculations
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and potentially false signals.
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When we look at this chart here this shows the S&P 500 in
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an upward trend for one year.
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We can note that the SP was trending upwards and while it
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was, the TRIN indicator was below 1.0 on the bottom side
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of the screen. Further confirmed by the double exponential
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moving averages that are on the chart, helping us
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gain a strong read of the trend that is in play. This chart
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of the NASDAQ shows another example of how the TRIN indicator
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compares with key turning points in the NASDAQ chart by using
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the TRIN and focusing on the NASDAQs price movements,
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we can make several observations. If we utilize the TRIN
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and we're trading the NASDAQ at this time,
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we could make several strategic moves as well. In this example
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that we have here when the TRIN is above 1.0 yet below 2.0
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it signals that the stocks are under pressure and a short-term
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decline might be near. In this example, there are three instances
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that we already have circled, where the trend spiked and signaled
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a short-term correction in prices. On this chart the candlesticks
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marked by the red arrows show the resulting price action
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after the trend spiked. In the first instance on the left,
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there was a Morning Star type of candlestick pattern.
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In the second instance,
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there was a Harami like candlestick pattern showing support
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from the 50 and 200 period moving averages.
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In the third instance, the trend spiked and
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indicated to decline. There was a subsequent bullish reversal
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with a candlestick pattern helping confirm. While these patterns
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each have differences,
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there is generally a three-step trend here. The step one is
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the trend signals a correction by spiking and price falls
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accordingly. Step two is price confirms a reversal and is
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further validated by its volume. Step three is price exceeds
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the previous high. Another great way to trade with the TRIN
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indicator is to apply the Bollinger Bands like we were mentioning.
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By using the TRIN alongside
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the Bollinger Bands, traders can strategically decide what
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moves to make depending on when the trend spikes and test
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the upper level or lower level of the bands. Bollinger Bands
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are very popular because they consist of three bands on the
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chart and are relatively easy to read and relatively reliable as well.
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The middle line is usually the 20-day moving average
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and serves as the base for the upper and lower bands. The upper
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and lower bands are usually set to two standard deviations
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away from the moving average and are used as a way to measure
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volatility by observing the correlation between the bands
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and price itself. Using the trend indicator with the Bollinger
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Bands can look something like this with this chart here where
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we have a few cases of the trends spiking on bottom circled
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already and what price did also conjunct,
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or also added to reaching the outside area of the band and
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then shortly dropping thereafter. This occurred a couple
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times over as you can see.
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There are several advantages of using the TRIN indicator,
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so let's cover a few of those. As we discussed when dissecting
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the calculation of the TRIN, a tool like the TRIN gives
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traders a deeper insight into market performance and trends
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by examining which assets are advancing and which ones are
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declining. Also, another advantage: the TRIN compares advances
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to volume. While most traders only pay attention to price
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movement, volume truly plays just as big of a role.
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Price movements that correlate with high volume
hold more significance than
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price movements that correlate with low volume.
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Why? Well, low volume usually does not cause a significant
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price shift, while high volume implies a larger scale significant
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shift that may last longer. Also, the TRIN provides traders
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with a clearer picture of what is truly going on in an index
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and that's a simplistic benefit, but it is a benefit nonetheless.
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Also the TRIN is a good indicator to predict stock movements,
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because of the way it calculates in a rather simplistic manner.
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With the TRIN's formula, its values serve as buy, sell, and even
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hold signals. These values tip-off traders on which way a
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stock index might be trending.
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While the TRIN indicator has several advantages.
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There are also some limitations that we should talk about as well.
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The first is, the TRIN is always prone to inaccurate results
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at times, because of the emphasis it places on volume.
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For example, if there's an instance when there are twice as many
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advancing stocks as declining stocks and twice as much advancing
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volume as declining volume, the trend would yield only 1.0
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which would equal a neutral indicator reading.
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Additionally, say that there were three times as many advancing
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stocks is declining stocks and twice as much advancing volume
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as declining volume. Despite the bullish day,
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the TRIN would yield a 1.5 which could equal a sell signal.
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These instances are clear examples of how the trend can be
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misleading if we follow it blindly without taking outside
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information into consideration.
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If we were to elaborate further on that, the TRIN is not
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always going to be reliable as a standalone indicator like
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we've mentioned. Once we couple it with Bollinger Bands the
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TRIN then becomes a much more powerful adversary and much
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more appealing to traders of all types.
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So in conclusion, while no single trader or no single indicator,
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I should say, is ever going to be able to accurately predict
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the future, at least on the broad scale that will all be able
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to access, the TRIN indicator does a very good job of providing
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valuable information to us, but as with all indicators, it's
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important for us to use outside.
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Knowledge outside price action to further confirm the reads
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that the indicator is providing. Just because the indicator
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doesn't work 100% of the time doesn't mean that there's no
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value in it.
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Remember we can be profitable traders, even when we only
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win 60 or 70 percent of the time. Other than that folks,
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thank you for joining me again.
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It's always a pleasure.
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I'll see you in the next one.
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Cheers folks.
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Happy Hunting happy trading over and out.
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