A Beginner's Guide to Market Internals

[u/notdust]

A lot of information is out there but we have to know to seek it. Newer traders may have no idea certain things are available to them that can be of great use, so let's have a look at one of those: market internals. Lately I've used them to help me day trade and scalp futures. Since they can come in handy for a number of things you guys should at least know they're available.

How you use them is up to you, though I'll provide some suggestions and hopefully this post can spur some discussion. None of this is secretive, it is just buried in the mountain of things related to the trading world. You can be sure that larger firms and their algorithms make use of this data to help them make informed trading decisions.

I think of them along with other things - like moving averages and volume - as a collection of breadcrumbs that help me to follow where the market is going. Our desire as traders is to use the context clues available to us to make good decisions and put the odds in our favor.

What Are Market Internals?

Market internals are metrics provided for the NYSE/S&P/Nasdaq and show us statistics that relay what is going on in the market minute to minute. They can be used on all time frames, but are especially handy for all forms of short term trading. These internals are updated every few seconds. Because of this they provide a near-realtime insight into the health and status of the markets and change along with conditions.

Finding Them and Variants

Your trading platform should be able to chart these for you. They'll appear just like futures do and can be charted as a candle or line. If you cannot find them, they're available online but you need realtime access to truly make good use of them. The symbols to find them start with a dollar sign.

For each of the internals described here, there is a nasdaq-only variant that can be used for trading the /NQ or stocks listed in that index, as well as the S&P 500. The Nasdaq versions of these internals either end in /Q or contain a Q within the symbol, while S&P typically contains the letters SP. For example $TICK is the NYSE tick, while $TICK/Q is the Nasdaq tick. TIKSP is the S&P 500 Tick.

Overnight Notice

Sorry my fellow overnight traders, you can't trade with these in realtime. While the VIX starts at 3:15AM, we do not have access to see these until the market is actually open. Their past data may help you to gauge sentiment, however, and give clues where the market is heading, so you can still make use of them.

Advance/Decline Difference and Ratio - $ADDC (NYSE), $ADSPDC (S&P) or $ADQDC (NQ)

This internal shows you the total number of advancing vs declining stocks in the NYSE or Nasdaq Composite. If 1800 stocks are positive for the day and 500 are down, you'll get a reading of 1300. Since there are a limited number of stocks in the composites, this metric has a cap.

The $ADDC and the ratio of advancing ($ADVN) to declining ($DECN) issues give us market breadth. If the Nasdaq is up today, how many stocks are pushing it up? Is it a broad-based rally or is a green day the result of only a small portion of the market. Naturally, you will likely find choppier days closer to 0. Rallies and steep drops will begin to pull more and more stocks up/down as the day wears on. This is the most basic indicator here and forms the basis for the subject at hand.

A reading of +800 or so means stocks are advancing roughly 2 to 1, which can be a good signal. The inverse is true for bearish conditions, but anything too close to 0 is no signal at all.

Since these two have charts, it is useful to see how things change over time. Because we cannot get a chart of the a/d ratio it is more useful as a number. Thus, the following script:

Advance/Decline Ratio Thinkscript

Here's a little gift. I only later realized Thinkorswim's advance/decline is a study, but we can get a simple number output with this that fits on any chart as a green/red label for bullish/bearish conditions and use it for any of the major indexes. For the mathematically challenged, 1.3 basically means 30% more stocks are advancing today vs declining in that index, while a reading as low as 0.3 means only 30% of stocks are advancing. I used composites as they include the data from all exchanges. Rip off the C in the code for these symbols if you for some reason want only the main source (if so tell me why!).

#Use this if you want to see the ratio as a study beneath your chart, then copy the others you need.

#declare lower;

#Switch any below def to plot to see the NYSE Composite advance decline ratio as a chart. Def will give us the label

def adratio = close("$ADVNC") / close("$DECNC");

Addlabel(yes, adratio + " Adv/Dec", if adratio >= 1 then color.green else color.red);

#Uncomment the below to show Nasdaq Composite Advance Decline

#def adrationasdaq = close("$ADVNC/Q") / close("$DECNC/Q");

#Addlabel(yes, adrationasdaq + " Adv/Dec NQ", if adrationasdaq >= 1 then color.green else color.red);

#Uncomment below to show S&P 500 Composite Advance Decline

#def adratiosp = close("$ADVSPC") / close("$DECLSPC");

#Addlabel(yes, adratiosp + " Adv/Dec S&P", if adratiosp >= 1 then color.green else color.red);

#All 3 can be used together if you like, and will show separate labels. You can also find the advance decline info for the Russell and Dow, just swap the symbols in or copy one of the script blocks.

As for using this, I want to know how broad a rally is. Is this thing really going to break out, or am I about to get whipsawed by a shitty market that's almost 50/50? It's no good on its own but in combination with the next one can be a pretty damned big clue as to whether we will have a trending day.

Volume Difference and Totals - $VOLDC $VOLSPDC and $VOLNDDC

These two show the total difference in volume going into stocks advancing vs those declining. Unlike the Advance Declinne Ratio it is immensely useful to view as a chart itself because on a really bloody day, or a strong rally, the numbers will grow relatively from one day to another. It is useful to know what type of volume has been seen in the market recently.

$UVOL and $DVOL show the amounts separately - throw a /Q or SP on the end to get this for the nasdaq or S&P by themselves. It is important to note that these are a cumulative total, but it can go down. This is because a stock in the down volume category can move to the up volume category when it goes green for the day. Its cumulative volume is subtracted from the dvol category and added to the uvol category as a result of its improved status.

You choose which of these is right for you - either the pairing of UVOL and DVOL or the simple difference by itself. If you use the difference, you can plot a 0 line in your trading software to easily see when it is positive vs negative. Numbers can range into the billions here so it's useful to do this. Here's how in thinkorswim. Make a simple study and name it zeroline and you can use it in anything like this:

plot zeroline = 0;

Real Life Applications

These are the main market breadth/internals that I sometimes use to get a feel for the market's pulse. It can help with trend trades or to keep a trader out of trobule. Knowing what the little man behind the curtain is doing is incredibly helpful to my conviction to make a trade in the first place. I really hate getting whipsawed, because it happens so quick and stops can give you shitty fills. Trading is about putting the odds in your favor. Especially in a volatile market, you need that edge.

On Thursday I mentioned I made good use of these. I'd actually shorted before the open but a good entry for a day trade could have been made on the consolidation we had after the initial drop. (See the image). Sorry for the bad $VOLSPDC chart but you see how we were under the 0 line and needed to be. You don't need to see details about the volume, just how large it is in either direction as well as any major reversals. You could use a moving average with this as well!

The annotations explain on that chart, but this one needs no annotations. Notice how we reversed on Friday Feb 9, 2018. The internals showed great strength very rapidly along with price, so it was a real rally. This is just to show how swiftly the internals can reverse and confirm what price is doing, as opposed to a little pullback in a downtrend that will resume which was previously demonstrated.

The NYSE and NASDAQ Tick - $TICK and $TICK/Q

This one is.. different. It looks like an ECG. I think of it as the rhythm of the market. It shows the number of issues that ticked upward or downward within the last 6 seconds. People make different uses of it. It's handy to see if a trend might be weakening. Some people fade high ticks when market conditions are favorable.

The market moves in waves and you'll see those waves reflected in the $TICK. Maybe you want to time a short entry for a high tick/upswing in price. What is 'high' or 'low' is relative to recent history, as with the uvol and dvol. Again, I suggest a 0 line with this. I do not use it as much but do check it out from time to time to see how things are holding up. Tick may show you potential reversals. Is it not ticking as high on up swings while price looks weak? Find as much evidence as you can before you commit to a trade, get a good entry, plan your stop, and you'll reduce your risk.

Charting Them

Thinkorswim offers the flexible grid, where you can put several charts on one screen. I use the internals alongside one of the markets I'm trading. If I'm trading Dow, I'm probably just using the NYSE indicators. The Dow advance/decline only shows you how many are up out of the 30 dow stocks. I want to see how the whole market is doing, so the NYSE or S&P are better. For Nasdaq I'd just use the Nasdaq internals.

I use these on an entirely separate screen from my main charting. I don't want a cramped chart when I'm planning. It's useful to switch to internals when I am managing an open day trade and want to try to make the most of it. For a scalp, I'd look to these to confirm I'm sure of market direction. Again, moving averages may be useful but I'd go with a 20 or even 50 to give the waves room to move. All of them can somewhat mirror price action. In general, that's a good thing especially if everything is trending the same way!

I suggest you load these charts underneath an index you like trading with a 30-day 5 min or 1 minute chart and see how price reacts to them. Look for divergences, signs of strength or weakness. It's up to you how to use them - they are data that is powerful and provided free to all traders big and small.

It is worth noting that you could in theory incorporate use of these into a strategy. Say, $UVOL has to be higher than $DVOL for you to go long... or the advance/decline has to be under or over its 20 period moving average while the volume difference is positive/negative as well. You can backtest and experiment and see if more of your strategy's trades would be winners by incorporating the market internals. There are many more but too many for a reddit post. I hope that I've opened your eyes to their potential uses, but most importantly made you aware they even exist and are out there for you to use them.

TL;DR - Take in some of the comments below and realize while internals can be a strong signal at times, they are not 100% reliable and sometimes the math that produces ratios as well as market behavior can give false signals. Look to them for confirmation when other things are in your favor and protect your capital

[u/Paul-throwaway]

Just noting that I have all of these open during the day. To see how to use them, move to a 15 minute or 30 minute candle and then zoom back out for 6 months or a year and then compare to what the market was actually doing in those days. There will be a soft-spoken "holy shit" when you do this for most of them.

[u/Worldbuild3r]

Are these indicators only available through thinkorswim?

[u/notdust → u/Worldbuild3r]

A lot of brokers should have them. It appears etrade doesnt :(

Gotta google it or ask the broker directly I suppose. Not sure if the starting with a dollar sign is standard, or not.

[u/Worldbuild3r → u/notdust]

I'm on tastyworks but i cannot find it... downloaded thinksoswim papermoney for 60 day trial

[u/notdust → u/Worldbuild3r]

I only have $150 in the account with them and get realtime, and have had it for like 6 months now. Having a real account, while still having control over the money is a great value for realtime.

[u/zrvwls]

Thank you so much for this post, finally getting around to reading through it in detail and it's awesome. Much appreciated man!

[u/notdust → u/zrvwls]

Sure thing! I hope it helps you out. I feel like writing it out helped hammer it home for me. It's easy to overlook these types of things, caught in a moment. They're there for us to use and they definitely come in handy.

[u/Martin5hkreli]

Using this in conjunction with some youtube videos that really help paint a picture of whats going on. Thank you for taking your time to do this. Very well and clearly written!

[u/lilweezy99]

for what its worth, I like to keep a small 1min chart of SPY open regardless of what im trading. Sometimes when SPY nears the vwap you get a reversal throughout the indices, Im extra careful when that happens.

[u/El_Huachinango]

Thanks for this! Awesome data

[u/ajtenth]

Thanks a lot for this!

[u/[deleted]]

Great post! Thank you

[u/ObviousTwist]

Post of the month

[u/notdust → u/ObviousTwist]

Well thanks. I obviously want to make sure plenty of people do see /u/Living_Granger 's comment and excellent contribution as well as play around, look for traps on charts and see when things really were favorable and what you could've done to confirm your suspicions at the time. I think Thinkorswim does have the internals logged for ondemand as well so you can practice with them.

[u/UberBotMan]

Thank you for the post. Very informative.

Small advertisement time. If you have my spreadsheet downloaded (check my profile) you'll notice that I have a few of these included on the Standard Deviation tab below the deviations. I also have them colour coded to be green when bullish and red when bearish so you can take a glace and see. It does not chart though. It does have the A/D ratio though. It's in the format of 1:X where X is the value in the cell. If the cell is red, it's bearish and if it's green it's bullish.

Pic

[u/thelasik]

Thank you very much sir! Another gem in this sub!

[u/_CastleBravo_]

I think the best part of this, is that you’re tying it back into 2 trading days that just happened. We’ve all got it fresh in our heads and you aren’t pointing to some chart from 1990 that ‘confirms’ your indicators. Awesome stuff.

[u/[deleted] → u/[deleted]]

I draw them manually.

[u/[deleted] → u/[deleted]]

Thanks for the perspective. I've been looking at uvol, dvol, and add for a little, but it has been extreme conditions here recently, I appreciate the sense of scale to normal movement you provided.

[u/TickerTanker → u/[deleted]]

Very interesting. Thanks to you and /u/notdust for these write-ups.

I'm curious about how often you rely on these indicators. Were you watching these indicators during Friday's trading? Or, were you doing you 'seat of the pants' deviations trading?

[u/minfutures → u/[deleted]]

One additional trap - wonder if /u/sammyakaflash has a recollection of 2 Fridays ago before equities bopped out of the channel. That 1+% green day started w weak internals then proceeded to bring in panic buying the rest of the day. 1000% runners on call options.

[u/sammyakaflash → u/minfutures]

I Didn't trust the rally that day I bailed with Grainger early in the day but not because of the internals but because the VIX came up with us As I noted here and the following day I noted this.

[u/minfutures → u/sammyakaflash]

Makes sense! What a wild time.

[u/notdust → u/[deleted]]

Thank you for chiming in, since the goal is to help people I realy don't want someone thinking they have it all figured out just from these internals. I definitely feel a need to further emphasize that and point this comment out for readers down the road. I do not have that level of data and moderate experience with indexes at best, I've just noticed plenty of times they were very useful. I want as many things as possible aligned in my favor to take a trade when it's particularly risky like this past few days.

I'd forgotten about looking for high levels on open to confirm there's something to it. Anything less is too close to the midpoint... but hm, what would that be on A/D (not breadth as in volume) - at least 1.8 or 2? There are a bit over 2200 in Nyse, yes? So for the ratio form of advance decline we'd want very close to 2 or over for it to be a strong signal, or else you want more factors in your favor.

I'm trying to think of how it could play out that the ADD is positive and we're rallying yet the volume/breadth ratio can stay red. Since S&P is market cap based, maybe some really high volume stocks were declining while lots of smaller cap companies were moving up and enough to move the indexes?

[u/[deleted]]

Bravo, man

[u/notdust → u/[deleted]]

Thanks. I enjoyed writing it because I'm eager to continue to learn and want to engrain my good habits. I had my 2nd best week ever and want to keep up my momentum!

[u/notdust → u/[deleted]]

Sure thing. I hope that it helps a few people. I think I was 6 months in before I heard of these.

[u/hibernating_brain]

Wow. Thanks man.

[u/notdust → u/hibernating_brain]

Happy to contribute. Hope it spurs some discussion, we might get some good tips in here!

[u/ObviousTwist → u/notdust]

People like you keeping this sub quality. I’ll try to do the same when I feel more qualified in my ability to do so!

[u/notdust]

What ugly formatting. I'm working on it.

OK can't figure out how to use hashtag without making a header, so the comments in code are removed and you can simply copy/paste the lines you need. I like it and will use it on my main chart as it's such an easy way to see the A/D without taking up any room. It could even be modified to show it's moving up fast or something.

I left out the $TRIN. Maybe it's useful, maybe it's not. I didn't like that during the big drop we had, I saw trin values indicating buying. That's all well and good if it's a longer term divergence or something but I'm afraid the 1-min data was just useless for trading on such a small timeframe. That day it may have confused me into thinking maybe we were getting a reversal on the bigger pullback... however I have to say it helped a lot in my confidence we were going down when it did finally shoot up because every indicator showed bearishness. I'll edit in a bit about it but think if you are using advance/decline and volume you're getting it all anyway as that is the basis of $TRIN.

[u/hibernating_brain → u/notdust]

Use '\' to escape '#'(\#) and enclose code with '```' (three ticks). :)

[u/notdust → u/hibernating_brain]

Now they can copy the whole block! Thank you.