There is a button on the Utility Network Analyst toolbar (the same one you run your trace from) called Set Flow Direction. You need to use that to establish/calculate your flow direction before you can use the direction trace tools.
- Click the Editor menu on the Editor toolbar and click Start Editing.
- Click the Set Flow DirectionSet Flow Direction button on the Utility
- Network Analyst toolbar. This sets the correct flow direction for
- Click the Editor menu on the Editor toolbar and click Stop Editing.
- Click Yes to save your changes.
(from Setting the flow direction - ArcGIS Desktop Help)
There is also an ArcToolbox geoprocessing tool called Set Flow Direction that will do it, under Data Management > Geometric Networks. This can be used to set the flow direction based on different factors - source/sink, digitised direction, against digitised direction.
It may be an option to set flow by digitised direction rather than source/sink to help overcome your flow through loops issue. We don't use source/sink for our networks, we only use digitised flow direction.
Digitised Flow Direction means that the geometric network uses the direction you have drawn the lines in your GIS as the direction of flow. So if you start drawing your line at Manhole A and finish your line at Manhole B, then your flow will be Manhole A to Manhole B. To use this on an established dataset means you would need to ensure every line was drawn in the direction of flow.
Check that your lines are actually connected in your geometric network. To do this, start editing and select a handful of lines (to test) and click the Connect button on the Geometric Network Editing toolbar (this is different to the Utility Network Analyst toolbar you use for tracing).
Once they are connected, try the Set Flow Direction button again and see if the lines you just connected now have flow direction set.
Also, check out Esri's Water Utility Network Editing and Analysis Tools. This features a couple of new toolbars that will help you set up your geometric network and with future editing and tracing. One of the tools will even flip your line digitised directions to match the flow direction so that everything is the right way, although this does require flow direction to be set first. My team uses these tools all day every day.