Education / Indicators / Arms Index/TRIN

In common words the arms index (Trin) indicates when the market is deeply overbought/oversold. Overbought and oversold markets present excellent trading opportunities because the pendulum is eventually apt to reverse and "swing" sharply the other way. The Arms Index is an indicator that uses advancing and declining stocks and their volume to measure intra-day market supply and demand and can be applied over short or longer time periods. The Arms Index is named after its creator Richard W. Arms and is also know as the "TRIN" index.

Calculation

The Arms Index is calculated by first dividing the number of stocks that advanced in price by the number of stocks that declined in price to determine the Advance/Decline Ratio. Next, the volume of advancing stocks is divided by the volume of declining stocks to determine the Upside/Downside Ratio. Finally, the Advance/Decline Ratio is divided by the Upside/Downside Ratio.

If more volume goes into advancing issues than declining issues the Arms Index falls below 1.0. If more volume goes into declining stocks than advancing stocks the Arms Index rises above 1.0.

The general rule-of-thumb for interpreting the chart is that readings below 1.0 are considered bullish. Readings in the .70-.80 range are considered extremely bullish and warn of overbought conditions. Conversely, readings above 1.0 are considered bearish, and readings above 1.35 are alerts to oversold conditions and potential reversal to the upside.

Using moving averages of the index is one way to smooth the Arms Index. Some traders look for moving average crossovers or zero line crossovers in developing trading uses for the Arms Index. What constitutes an "extremely" overbought or oversold level depends on the length of the moving average used to smooth the indicator and on market conditions.