What is the TRIN (Arms Index)?
The TRIN, also known as the Arms Index, is a market indicator which shows the relationship between the numbers of stocks increases or decreases in price (advancing/declining issues) and the volume associated with those stocks which have shown an increase or decrease in price (advancing/declining volume).
The Arms Index was developed by Richard Arms in 1967. It is also known as TRIN (an acronym for Trading Index).
The TRIN is mostly used as a short term trading tool. The index shows whether volume is flowing into advancing or declining stocks.
The index is less than 1 if more volume is associated with advancing stocks than the declining stocks. The index is greater than 1 when the case is vice versa. It is considered bullish when the index is below 1.0 and bearish when it is above 1.0.
The index is normally smoothed by incorporating a 4-day moving average for short-term analysis, a 21-day moving average for intermediate-term, and a 55-day moving average for longer-term analysis.
The Index works most effectively as an overbought/oversold indicator. When the indicator drops to extremely overbought levels, it indicates a possible selling opportunity. When it rises to extremely oversold levels, a buying opportunity is said to occur.
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.
Chart. 4-day Moving Average (yellow) of TRIN and the S&P 500 Index ETF (SPY) price chart above.
There is a three steps calculation for Arms Index:
- Divide the number of stocks advanced in price by the number of stocks declined in price to arrive at Advance/Decline Ratio.
- The volume of advancing stocks should be divided by the volume of declining stocks in order to calculate Upside/Downside Ratio.
- Lastly, the Arms Index is computed by dividing Advance/Decline Ratio by Upside/Downside Ratio.