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If you want to survive day trading, you need to inspect the market internals. My absolute favorite indicator for this on Thinkorswim is the $TICK. The NYSE tick index gives us the raw relationship of stocks ticking up versus ticking down at their last traded price.
If there are 3,000 stocks trading on the NYSE, and 2,000 trade higher from their previous price while 1,000 trade lower, the $TICK reads +1,000. It’s that simple. I watch the ticks on a 15-minute candle right below my SPX chart.
Reading the Tape With the Tick Index
A +800 means bullish buying and a -800 means bearish selling. Ticks between 500 and -500 indicate pure chop. If we’re trading around zero on the $TICK, the market is flat and boring.
When I want to get long, I need to see the ticks in positive territory, preferably holding around +800 on the 15-minute chart. If I see the ticks fall to zero, reject it and shoot right back up to positive territory, that tells me aggressive buying is hitting the market.
You flip the exact same logic for short positions.
If I’m long the SPX and the ticks hit +1,000, aggressive buying is everywhere. Usually, after an extreme +1,000 tick, I sell a part of my position — or I use it as a target.
If I’m long SPX and ticks hit -800, the bears are coming in to sell the market, so I use that as a stop to get out of my long position. That’s how market internals give me targets and stops.
Catching Reversals With the TRIN
Next is the TRIN, which stands for the Traders Index. Richard Arms developed it in 1989, so it’s also known as the Arms Index. Its main purpose is detecting overbought and oversold levels.
You take the number of advancing stocks divided by declining stocks, and divide that by the volume of advancing stocks over the volume of declining stocks. The result is inverse to the market. A positive reading is bearish and a negative reading is bullish.
A ratio of 1.0 means the market is at parity. A 2.0 means much more volume is pouring into declining stocks. A reading below 0.6 means more volume is flowing into advancing stocks.
If the TRIN closes below 0.6, the market has an 80% chance of selling off the next day. If it closes above 2.0, the market has an 80% chance of rallying the next day. If after closing above 2.0 the markets DO NOT rally the next day, a major sell-off could be in store.
Riding the Trend With the Advance Decline Line
Finally, look at the $ADD, which I prefer for the advance decline line. You express it as the number of advancing stocks minus declining stocks.
A +1,500 reading is bullish and anything over 2,000 is extremely bullish. These extreme readings indicate trending days where the market will just keep trending all the way into the close.
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.Â
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