In this guide to understanding the Arms Index (also called the TRIN), we’ll show you what this chart looks like, explain its components, show the formula for calculating it, teach you how to interpret it, and discuss its limitations.
The Arms Index is a volume-based confirmation indicator as well as overbought and oversold indicator.
Components of the Arms Index
The Arms Index has four components listed below:
- Advancing Issues on the New York Stock Exchange (NYSE) – $ADV or $NYADV
- Advancing Volume on the NYSE – $UVOL or $NYUPV
- Declining Issues on the NYSE – $DECL or $NYDEC
- Declining Volume on the NYSE – $DVOL or $NYDNV
Formula for the Arms Index
The formula for the Arms Index is:
(Advancing Issues / Declining Issues) / (Advancing Volume / Declining Volume)
The Intra-Day 5-Minute Chart
The intra-day 5-minute chart of the mini-Dow futures contract shows the $TRIN:
How to Interpret the Arms Index
- Neutral Reading = 1
- Bearish Reading > 1
- Bullish Reading < 1
The trend of the Arms Index is usually more important than whether or not the Arms Index is above or below 1.
As can be seen in the intra-day chart above, when the mini-Dow was falling in price, the Arms Index was increasing.
At 1.5, a very high Arms Index reading, a trader might take a contrarian stance and buy at the 1.5 level.
In addition, a trader might consider waiting to see a reverse or bottoming of the Arms Index before taking such action. Also, notice that when the mini-Dow is increasing, the Arms Index is decreasing.
Using Moving Averages With TRIN
The Arms Index can be used from a longer term perspective. Some traders use moving averages of the inputs into the Arms Index equation.
(10-day Moving Average (MA) of Advancing Issues / 10-day MA of Declining Issues) / (10-day MA of Advancing Volume / 10-day MA of Declining Volume)
Or: one could simply take the 10-day Moving Average of the $TRIN.
Problems with the Arms Index
There are mathematical oddities with the Arms Index.
According to the status quo interpretation of the Arms Index, a reading below 1 is bullish and a reading above 1 is bearish. However, what if there were a truly bullish day?
Example: A Very Bullish Day
For this example, twice as many stocks will be gainers than losers on this day. Likewise, twice as much volume was transacted with the stocks that were gainers than was transacted with the losers of the day.
To recap, a very bullish day, gainers (Advancing Issues) outpace loser by a 2 to 1 ratio, and institutions are heavily accumulating stock of those gainers by a ratio of 2 to 1, basically lots of Advancing Volume.
The calculation would be as follows:
(2/1)/(2/1) = 1.0
An Arms Index reading of one is supposed to be neutral, yet the example above was extremely bullish.
Example: Advancing Issues at 3 to 1
Suppose Advancing Issues were 3 to 1 and Advancing Volume was 2 to 1. This is yet another bullish scenario. This calculation is shown next:
(3/1)/(2/1) = 1.5
A reading of 1.5 is extremely bearish, yet Advancing Issues outpaced Declining Issues by 3 to 1 and Advancing Volume outpaced Declining Volume by a ratio of 2 to 1; very bullish inputs.
Example: Advancing Issues at 2 to 1
By reversing the previous scenario and making Advancing Issues stronger by a ratio of 2 to 1 and Advancing Volume stronger by a ratio of 3 to 1, the status quo interpretation of the Arms Index is found.
(2/1)/(3/1) = 0.67
The result, 0.67, is a strong bullish reading confirming this calculation’s bullish inputs of 2 to 1 Advancing Issues and 3 to 1 Advancing Volume.
Emphasis on Volume
The Arms Index emphasizes volume. In the first example above, there was twice as many Advancing Issues and twice as much Advancing Volume.
Therefore, 67% (2 to 1 is equal to a 67% and 33% split) of all NYSE issues were advancing, and subsequently 67% of all NYSE volume was with Advancing Issues.
For the Arms Index to give a bullish reading, the Arms Index would expect there to be more volume poured into the advancing stocks, such as in the last example where 75% (3 to 1 is 75%) of all NYSE volume was in Advancing Issues.
Nevertheless, a person could legitimately question why 67% of all NYSE issues being gainers and 67% of all volume being with winning issues could be considered neutral.
Arms Index Alternatives
There are some alternatives to TRIN that don’t have the same drawbacks as the basic version.
Separate the Components
Separating the two components of the Arms Index is a viable alternative.
- Advance/Decline Ratio: (Advancing Issues / Declining Issues)
- Upside/Downside Ratio: (Advancing Volume / Declining Volume)
Average Volume Per Issue
Another alternative is creating an average volume per issue:
(Advancing Volume / Advancing Issues) / (Declining Volume / Declining Issues)
This version is more intuitive. It would be bullish above 1 because there would be more average volume per up issue and the indicator would be bearish below one because there would be higher average down volume per issue.
What to Watch Out For With Average Volume
The same type of problems could arise as those with the Arms Index. In this case, very few issues could be gainers, but the stocks that were gainers could have high amounts of volume.
Thus the top half of the equation would be greater than the bottom half, returning a bullish signal, even though very few stocks advanced that day.
Probably the best alternative to the Arms Index is the market thrust indicator. Its formula is as follows:
(Advancing Issues x Advancing Volume) - (Declining Issues x Declining Volume)
With the market thrust indicator, the more advancing issues, the larger the market thrust value. Similarly, the more advancing volume, the larger the market thrust value.
Of course, by using math and an imagination, a trader could come up with various other combinations.
Moral of the story: It is important to be a knowledgeable trader and know what the strengths and weaknesses of each technical indicator is; also, don’t rely on just one indicator.
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