Blog / Market Indicators #2.
Market Indicators #2.
This time we continue with some other important market indicators.
- TICK
- Volume Indicator TRIN, Trading Index (Also known as ARMS Index)
TICK:
TICK is the difference of the number of issues trading at the ASK level, minus the number of issues trading at the BID level at a specific time on a specific market.
It is the pulse of the market measuring the real-time sentiment of market participants.
Very often it is a leading indicator.
Because of its importance we present the following chart to demonstrate the setup, we use the TICK in our everyday trading:
The Symbol of the TICK is $TICK for the NYSE market and $TICKQ for the NASDAQ market within our environment (eSignal).
We add the following information to our charts:
- 9 period SMA ( Simple Average of of the HLC within each bar. (High + Low +
Close )/3)
- A horizontal Line at 0 TICK value, representing Neutral status
- A horizontal Line at +800 TICK value, representing extreme Bullish status.
- A horizontal Line at -800 TICK value, representing extreme Bearish status.
We actually use both of the 5 Min time-frame and the 60 Min time-frame TICK charts to support our decision making. (Occasionally switching to the 60 Min TICK chart to get longer-term overview, but doing that only 1 – 2 times during a market day.)
What are we looking on the TCK chart:
- The number of occasions during the day, when the TICK hit extreme Bullish
levels, at or above +800 level for the NYSE. (This level a bit different for eth
NASDAQ market
- The number of occasions during the day, when the TICK hit extreme Bearish
levels, at or below -800 level for the NYSE.
- The distribution of the TICK above the zero line and below the zero line.
- The time, the 9 period SMA spend below the zero line during the day, and
above the zero line during the Day.
(During strongly up-trending market, the TICK average stays above the zero
line most or all of the day, during strongly down-trending markets the TICK
average stays below the zero line most of the day, and during range markets,
the TICK average spends about equal time both above and below the zero
line.)
- The direction of the TICK average line (Up or down)
- Divergences between the TICK / TICK average and the Price charts.
- The Maximum / Minimum values of the TICK average and their relative level
compared to TICK average maximum / minimum levels during the previous 2 –
20 days.
The time, when the TICK average crosses the zero line is important, but best trading opportunities occur prior to that most of the time. So the optimal position entry point usually between the time, the TICK average reaches extreme positive or extreme negative levels and crosses the zero line later. But to make a very quick decision at the time the direction of the TICK average changes usually will not be good entry either. Additional supporting information needed to make that decision.
Sometime we can recognize transitions in the TICK. These transitions could be revealing.
Before these transitions the TICK mostly in either positive / negative territory, and after the transition the TICK will be mostly in negative / positive territory or expressing differently on the other side of the zero TICK line.
Usually these transitions occur at range extremes or during balanced markets when strong program trading kicks in one direction and later in another direction.
Very important is that the TICK / TICK average is not as reliable indicator, as the A/D line.
Especially during the beginning of a strong market move either up or down the small CAP stocks are leading the way, and can mislead the TICK indicator – reliant trader.
At the later stages of a market move additional up moves can occur while the TICK average stays consistently below average. Similarly additional down moves can occur during late stages of market moves, when the TICK average stays above the zero line all day, and the market trends downward during the day.
So as it is true for most of the indicators, the effectiveness / usefulness of the TICK market indicator is also dependent on the general market conditions and market status.
Some of the highest probability trades can result if both the price chart, the A/D line and the TICK / TICK average are aligned and point to the same direction.
The differences between the NYSE TCIK chart and the NASDAQ TICK chart is bigger than the differences between the number of stocks on these two exchanges. It could be interesting research to quantify the differences in market efficiency due to the impact of specialists on the NYSE
TRIN:
The trading Index (ARMS index) is another tool in the hand of the Index trader.
It is less reliable than the previous two indicators, so the original formula for this indicator suggested only as a confirmation signal.
It is completely non-correlated with the price-carts, so you can gain more insight into the market by this additional information.
The value of the original TRIN is 1 at market – neutral state, below 1 and down-trending during bullish market periods and above 1 and up-trending during bearish market periods.
We also put three lines onto our TRIN chart, the horizontal line at TRIN = 1, the horizontal line for extreme bearish market periods at and above TRIN = 1.6 and another horizontal line for extreme bullish periods at and below TRIN = 0.55
We also use the 9 period SMA of the TRIN to quickly identify trending behavior.
Both the original TICK and TRIN concept could be further developed to improve the efficiency of the indicators, to decrease the time-period, when misleading and to improve the traders ability to clearly recognize potentially good entry / exit points and make better, more successful decisions.
One way to improve the TRIN usability for example presented on the following site:
http://emini-watch.com/products/trin-indicator
For those, trading the S&P500 index and related asset classes even more specialized variety of these indicators could be developed based upon the actual / current components of the S&P500 index (Though we know that index components change many times during a year.)