The Arms Index , also know as the TRIN – “TRading INdex", (ticker: $TRIN) is a volume-based confirmation indicator as well as overbought and oversold indicator. The Arms Index has four components listed below:
The formula for the Arms Index is simply:
(Advancing Issues / Declining Issues) / (Advancing Volume / Declining Volume)
The intra-day 5-minute chart of the mini-Dow futures contract shows the $TRIN:
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.
The Arms Index can be used from a longer term perspective. Some traders use moving averages of the inputs into the Arms Index equation. To illustrate: (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.
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