In an efficient market, all information about a stock, bond, or commodity is included in its price. Supply and demand are equalized through the trading process. The change in a security’s price gives you a first cut of information. Price changes can be analyzed in other ways to help you know when to buy or when to sell.
Trade on the tick
A tick is an upward or downward price change. For some securities, such as futures contracts, the tick size is defined as part of the contract. For others, such as stocks, a tick can be anywhere from a penny to infinity (at least in theory).
You can also calculate the tick indicator for the market as a whole. (In fact, most quotation systems calculate the market tick for you.) The tick for the market is the total number of securities in that market that traded up on the last trade, minus the number that traded down on the last trade.
If the tick is a positive number, that’s good: The market as a whole has a lot of buying interest. Although any given security may not do as well, a positive tick shows that most people in the market have a positive perspective right now.
By contrast, a negative tick shows that most people in the market are watching prices fall. Sure, some prices are going up, but unhappy people outnumber happy ones (assuming that most people are trading on the long side, meaning that they make money when prices go up, not down). This shows that the sentiment is negative in the market right now.
Track the trin
Trin is short for trading indicator, and it’s another measure of market sentiment based on how many prices have gone up relative to how many have gone down. Most quotation systems pull up the trin for a given market, but you can also calculate it on your own. The math looks like this:
The numerator is based on the tick: the number of securities that went up divided by (not less) the number that went down. The denominator includes the volume: the number of shares or contracts that traded for those securities that went up, divided by the number of securities traded for those that went down in price.
This solution tells you just how strongly buyers supported the securities that were going up and just how much selling pressure faced those securities that went down.
A trin of less than 1.00 usually means that a lot of buyers are taking securities up in price, and that’s positive. A trin above 1.00 indicates that the sellers are acting more strongly, which means a lot of negative sentiment is in the market.