Meta-Trader - $TICK, $TIKI and $TRIN

Welcome back Meta-Traders.

This past week was a bit rough in the markets for your humble blog author.  The market was down big 3 of the 5 days and the 2 intervening up days barely made up for the down days.  As you know, I'm mostly a long-side player so I took a hit.  It was more like just giving back some recently gains which is not at all unexpected after all this bullishness we have had lately.

Last week's "continuation trade" in LNKD was a bust and I ended up giving up the entire premium over just over 7 bucks paid.  Loss control was poor on this trade as I wanted to exit with a stop around 5 for a max loss of 2 or about $200.  But instead, I let it go to zero and lesson learned for long option trades is to always have a stop loss pointed selected ahead of time and stick with it.  John Carter points out in his excellent book Mastering the Trade, that managing exits is the difference between amateurs and professionals in this business.

On the positive side, I did okay with the "Morning Scalp" trade in my TradeStation account where I seem to be holding myself to a much tighter standards.  I did one trade on Tuesday in the AAPL 430 puts and was stopped for a 1 point loss.  I did another trade on Friday in the AAPL 410 puts where I bought for $9.87 and sold for $12 a few minutes later.  Had I held onto that trade until later in the day, I could have sold it for $18 and made $800 instead of $200.  In any case, I continue to hold gains my TradeStation account which is up about +11.2% for the year edging out the S&P by about 2 points.

As for personal development, I got through the chapter on "Reading Market Internals" in Mastering the Trade and found out some really interesting ways to interpret intraday action.   In the past, I found myself often reacting to price action alone, just to buy at the top tick of the day and wondering why I was left holding the bag.  Read on for a quick recap of these 3 intraday indicators available in TradeStation.

$TICK

Ticks summarize the number of stocks on the NYSE increasing in price versus those decreasing in price.  The number typically ranges between -600 and +600 with occasional spikes to -800 or +800.  Very rarely we see moves to -1000 or +1000.   Extreme readings in either direction indicate that buying or selling has reached extremes and can be used either to prematurely close long or short positions which are in the wrong direction, or to exit positions in the right direction at a profit.

One cool feature of TradeStation is that you can setup audio alerts when ticks reach extreme values.  In my case, I setup the "Cash Register" sound when ticks reach +800 and the submarine "Dive Horn" when ticks reach -800.  Ticks also give you a clue as to overall market strength or weakness.  For example, if ticks spend most of their time above 0 with occasional spikes above +800, that is positive for the markets overall.  Looking at the graph above, which was Friday's action, it was pretty much a mixed bag but slightly positive with a few +800 readings.

For another example, look at the graph on the left which was Monday, April 15, 2013.  Note how Ticks spent most of their time in the lower half of the chart with a few excursions below the -800 mark.  +800 was not reached until the last few 15-minute bars of the day, probably not until about after 2PM EST.

$TIKI

TICK is the same thing as the Ticks, but only for the 30 stocks in the Dow Jones Industrial Average.  As such, its values will range from -30 to +30.  John Carter sets audio alerts on these at -30, -28, -26, +26, +28 and +30.  These levels corresponds to levels at which program trades are being executed which would simultaneously push down (or up) all 30 Dow-30 stocks at the same instant.  Program trades are not the primary driver of price action, but can result in short term moves one way or the other. John Carter uses TIKI as a "heads up" only, but leaves the actual signal to the Ticks.

$TRIN

TRIN is probably the most confusing of these 3 indicators.  Its also known as the ARMS index named after its founder Richard Arms and is calculated as follows:

(advancing issues/declining issues) / (advancing volume/declining volume)

In other words, this is a ratio of a ratio and ranges between 0.5 .. 4..  Lower numbers mean bullish markets and higher numbers mean bearish markets.

Hubert has some rules regarding TRIN based on the closing values such that if TRIN closes at high values indicating extreme bullishness, he will go short into the close expecting a lower open the next day.  Conversely, if the TRIN closes at low values for the day indicating extreme bearishness, he will go long to the close expecting a higher open the next day.  I don't have the exact parameters for this setup, so I will hold off on that for a future post.

That's all of for now, enjoy your weekend and good trading.