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Blog / Market Indicators #2.

Market Indicators #2.

2010/03/27. - 16:34

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:

 

 TICK_Market_Indicator_Example

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.)

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