Constructing TRIN as a breadth-volume ratio

A ratio stacked on a ratio

The breadth tool also labeled TRIN or Trader's Index is constructed as one ratio divided by another. The first layer is advances over declines. The second layer is advancing volume over declining volume. That pairing is a ratio-of-ratios: a two-layer construction that compares how many issues are rising versus falling with how much volume those two groups attract.

The construction dates to 1967. It was specified first for intraday timing and later applied as a longer-horizon market-timing construction.

Auditing the 1.00 standoff

In that construction, a reading of 1.00 is defined as a standoff between the two component ratios. That standoff-reading means the issue mix and the volume mix are in the same proportion. A reader can check the printed value against that balance before assigning any meaning to a skew.

Readings below 1.00 are defined as advancing stocks receiving more than a proportional share of volume. Readings above 1.00 are defined as declining stocks receiving more than a proportional share of volume.

Volume, sentiment, and speed

The construction assumes that volume concentrates with the prevailing direction of market sentiment. That volume-sentiment-assumption is the working premise that volume concentrates in the group of stocks moving with the prevailing tape.

The construction treats the direction and speed of change in the index as more important than the absolute reading. That change-over-level rule is why a standalone printed value is not the object of the build.

Editorial: if advancing issues take more than a proportional share of volume, the tape hypothesis is that volume is concentrating with the advance. If declining issues take that share, the hypothesis is that volume is concentrating with the decline. Either claim is tested by the direction and speed of change in the index, not by the first number on the page.