How to Use Market Internals in Trading

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How to Use Market Internals in Trading


Traders who want to sync with the markets should consider what market internals can do. Market internals are indicators that use data directly from the stock market to calculate the market’s direction for the trader. 

The indicator gives traders a feel for what the underlying market is doing, which can better prepare traders to make trading decisions. However, only a few indicators are considered market internals and can give traders an edge in the market. Let’s explore what a market interval is and how it can benefit you in your trading journey.  

Market internals is a GPS guidance system that provides traders with additional guidance on stock market performance and sentiment. Traders rely on indicators that simplify these types of complex analyses. Market internals pulls in data that quickly summarizes essential market measures; to put it in other words; it’s like taking the market’s pulse. 

Essential market internals: 

  • Tick ($TICK) 
  • Volatility Index (VIX)
  • Advance-Decline ($ADD) 
  • Arms Index (TRIN)

Zooming out to take an overall view of market participation and sentiment can help traders make more informed decisions about their stock trades. These factors impact the stock prices and their activity and can be measured. We can break down these measurements into basic terms that are easier for traders to understand.

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Ticks Indicate Buying-Selling Pressure

The Tick ($TICK) indicator readings allow traders to gauge the buying and selling pressure on the New York Stock Exchange (NYSE). A tick index is a short-term indicator that is only relevant for a few minutes. Day traders often use the $TICK to view the overall market sentiment at a particular time. As day traders make quick decisions, they can consider the ratio of (up and down) stocks to determine if there is more buying or selling in the market.

There are approximately 2,800 stocks listed on the NYSE. The tick index measures stocks making an uptick and subtracts stocks making a downtick. For example, should 1,500 stocks make an uptick while 1,000 stocks make a downtick, the tick index would equal +500 (1,500 – 1,000).

The tick index can assess whether stocks are opening above or below their prior close and measures the net of all ticks on all the New York Stock Exchange (NYSE) stocks. Once the market opens, each stock is assigned a value: 

  • Plus 1 (+1): +1 is assigned if the last traded price was above the previous traded price
  • Zero (0): Zero (0) represents no change
  • Negative 1: (-1) if the price was below the last traded price, a -1 is given.

The summation of these values gives the value of the tick at any point in time. When the broader market is positive, readings tick up. A market that is trending lower will have negative ticks.

Readings of +1,000 or -1,000 are extreme and could represent overbought or oversold conditions. The tick index also explains how fast stocks are getting bought and sold. When the market is trading around zero with candles moving positive, that indicates the market is chopping sideways; when the candles touch the upper zones, that can indicate extreme buying.

To add the tick to your chart in the trading platform thinkorswim©, add the cash sign to your search text: $TICK. Thinkorswim© is a free platform created by TD Ameritrade that also provides access to scanners and charts. The SPY (S&P 500 ETF) is charted on top in the screenshot below, with the $TICK on the bottom. When the $TICK trends higher, so does the market.

Market internals: spy and vix chart
The TICK index can be helpful in the following ways:

Range-Bound Market: The tick index can help traders identify when a market is choppy. When $TICK readings bounce back and forth between -600 and +600, there are no extreme readings and no clear dominance between buyers and sellers.

Trending Market: The tick index can remain above or below zero for extended durations when a stock is trending. The $TICK readings will steadily be above zero if a market is trending higher.

Other indicators should be used in conjunction with the tick index, such as a moving average, to confirm the market is trending.

Divergence: Traders can look for divergence between the tick index and price to gauge the underlying strength of a market. Should a stock’s price be lower as the tick index is making higher lows, the sellers may be losing momentum.

Conversely, if a stock’s price reaches new highs while the tick index fails to hit new highs, this suggests weakness in the prevailing trend.

In summary, the tick index:

  • Gauges the strength of a market advance or its decline
  • Measures buying or selling pressure at the close of the previous trading day
  • Serves as an indicator of overall bullish or bearish sentiment

The short time measurements can vary from second-to-second, one-minute, or five-minute readings. This makes them much more important to day traders than swing or position traders. However, swing traders often refer to the tick index to gauge the market.

Use Market Internals to Swing Trade

By observing the opening and end-of-day ticks, swing traders that hold trades look for factors in extreme or neutral market activity. Swing trading is a position held longer than a day trade but shorter than a buy-and-hold investment that could be held for years.

When a day in the market starts with extreme emotions, this impacts swing traders. It can be determined by the ticks that could, for example, open at +1,800, which is very extreme. Traders consider +600 significant, while +1,000 and -1,000 would be very significant. Should the extreme emotions fade into neutrality, traders consider that a “tick fade.”

Traders are looking for indications of extreme buying and whether it can be sustained or if it will spike lower back into neutral territory. Intense buying at the open could open up opportunities for short trades at the market open.

The market internals tells swing traders what is happening in a quick time frame. This is helpful because traders in a swing position may see a surge in their portfolios.

A look at the ticks can explain why that could occur should a buying opportunity in the market be at play. The market can change quickly. A three-day period of extreme fear can pivot to extreme joy. This information is key when traders are looking to go long to the upside.

Indicators Identify Market Structure

While similar, the two indicators, $ADD and $TICK, work very well together, as long as the action stays positive the broader market does so also. However, should buying and selling slow down, the market drops.

The Advance-Decline Index ($ADD) measures the net number of stocks going up each day. To break it down – the advance-decline is the number of advancing stocks minus the number of declining stocks. This summary can suggest unrealized strengths and weaknesses in the market and gives traders a feel for the overall mood of the market.

Should most stocks in the market advance in price, this tells traders that market sentiment is pretty good. If most stocks decline in price, this could indicate that traders and investors are hesitant or fearful.

It isn’t uncommon for entire indices to be propped up by many holdings of mega-cap stocks like Apple and Microsoft. The S&P as a whole 500 can be moved upward based on these stocks even if most stocks are moving in a downward decline that day. When this occurs, traders refer to the weak structure of the market. Should the market leaders begin to fall quickly, the leaders will take the indices down with them.

There are two key advance/decline lines – the New York Stock Exchange (NYSE) and the technology-laden NASDAQ – with most traders referring to the NYSE. Divergences between the two can hold crucial information. It’s good to also look at the trend of the $ADD in a given day; if it’s trending higher, that’s a bullish signal, whereas if the $ADD is trending lower, that’s a bearish signal.

Market Internals for Day Traders

These indexes (or tickers) have a few practical uses for day traders. Specifically, tracking the advance-decline line essentially shows traders whether most stocks are trending. Or they’re advancing above or trading below the previous day’s close.

Should the ticks be above zero, the advance-decline is positive. Most stocks in the market should be up for the day, which means that ticks are advancing higher than previously. When the ticks are below zero, most stocks should be declining or going red and likely getting sold off. Zero becomes a finite line in the sand. Should the ticks move above it and the market is trending upward. Market internals show traders what the overall market is doing as a whole.

For example, if the advance-decline is very quiet and sideways yet above zero, this could indicate the market was trending and holding green. The indicator can give traders the ultimate edge by confirming that most market participants are doing the same thing.

One thing for traders to note is when advance-decline begins to develop ranges; traders should mark the key support and resistance levels. If the market gets some bad news and takes a big drop, most traders will probably not catch that drop.

Why is that important? When the market sells off, traders want to see the advance-decline doing the same thing because that can allow them to short the market to the downside – or go long to the upside. Traders can use this internals to re-enter trades and help hold onto trades. The advance-decline can confirm that it’s doing the same as the overall market.

Volatility Index (VIX) aka Fear Factor

Many call the VIX the “fear index” of the market. A long-term chart of the VIX doesn’t look like a stock chart at all because it’s an index reading. When viewing VIX, look at it on a lower time frame chart, like the 5-minute chart.

When the Volatility Index (VIX) goes higher, this is an indication that investors are buying a lot of expensive insurance on their portfolio in the form of put options. In general, when the market goes down, the VIX goes up and vice versa. You can see in the screenshot below that the VIX and SPY (S&P 500 ETF) move in opposite directions.

Market internals: Spy and Vix chart
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The VIX calculates the market’s 30-day view of annualized volatility in the S&P 500. The calculation analyzes how expensive option prices are compared to their intrinsic value and spits out a number like 15. A reading of 15 tells us that, over the next 30 days, the S&P 500 options market expects volatility to be 15% annualized.

Banks and brokerage houses created derivatives by which investors can directly speculate on the VIX, i.e., trade the VIX using options. Consequently, hundreds of securities use the VIX as a reference price. When there’s a big move in the VIX, money changes hands.

Short Term Traders optimize (Arms Index)

The Arms Index (TRIN) is a breadth oscillator that aids in measuring internal market strength or weakness. There is a significant difference between the Arms Index (TRIN) and the Tick Index ($TICK).

The Arms Index compares the number of advancing and declining stocks to the volume in both advancing and declining stocks. The tick index compares the number of stocks making an uptick to the number of stocks making a downtick and gauging intraday sentiment. The Tick Index does not factor in volume, but extreme readings still signal potentially overbought or oversold conditions.

The Arms Index also called the Short-Term Trading Index (TRIN), is a technical analysis indicator that compares the number of advancing and declining stocks (AD Ratio) to the advancing and declining volume (AD volume). It is used to gauge overall market sentiment.

It does this by generating overbought and oversold levels that indicate when the index (and the majority of stocks in it) will change direction. The Arms index seeks to provide a more dynamic explanation of overall movements in the composite value of stock exchanges, such as the NYSE or the technology-laden NASDAQ, by analyzing the strength and breadth of these movements.

While not a perfect system, traders look not only at the value of the arms index but also the changes throughout the day. They look for extremes in the index value for signs that the market may soon change directions.

Price Action Ultimate Goal

Traders need to remember that the asset or stock price is the one thing that indicators hinge on and is the one thing that pays in the stock market. Indicators have become useful and necessary for day and swing traders competing with volatility and unpredictability in the markets. Tools like market internals allow traders to see how the markets perform in real-time. Instead of after-the-fact, traders who can see the market in action give a definite edge to their trades.

If you are interested in day trading then consider joining Simpler Trading in the Simpler Day Trading room. Join today and gain access to exclusive resources such as the live trading chat room, premium weekly videos, the learning center, and of course a curated list of tickers our traders are watching. Sign up today, and never trade alone again.

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FAQs on Market Internals

Q: Is day trading really worth it?

A: Day trading is fast-paced and that fast pace is not for everyone. And it’s not easy. To answer if day trading is worth you you need to determine how much time you’re willing to invest in learning the craft.

Q: Does thinkorswim have Volume Profile?

A: Yes. Volume profile is tracking the volume continually with every purchase of every tick and contract, it’s populating the amount of volume that’s done at each price.

Q: Do professional day traders use indicators?

A: Yes. While you should rely on your trading plan and many other factors, indicators play a big role in your decision making, as they drive the technical analysis of a trade.

Q: What are day trading indicators?

A: Indicators are derived from both historical price data and predictive tools, and are a critical part of any trading strategy. They simplify price information, provide trend trade signals, and signal warnings for changes in trend.

Q: What does it mean to go long in a trade?

A: It essentially means that a trader has bought stock in a company and owns their shares of stock. The trader now makes money as the stock rises. And if the company issues dividends for owning the stock, the trader can potentially collect.

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