Richard Arms invented the analysis tool that bears his name in 1967. The Arms Index, a technical analysis indicator, is also called the TRIN (short for “Trading Index”) because it seeks to indicate overbought or oversold conditions by serving as an index of trading activity relative to price.
The Arms index is calculated using readily available data from major indexes such as the S&P 500 or NASDAQ. The ratio of the number of advancing stocks (stocks whose prices are increasing) to the number of declining stocks (stocks whose prices are decreasing) is computed to give us the A/D Ratio, a market breadth indicator that is one way of viewing the daily breadth of a security. The Advance/Decline Ratio uses the same numbers as the Advance/Decline Line but presents them as a ratio instead. The AD Ratio is sometimes more useful than an AD Line, including in instances where comparing AD for different indexes which have different metrics; the ratio is the standardization with which comparisons can be made.
Next, the trading volume of advancing stocks is divided by the trading volume of declining stocks to give us the A/D Volume Ratio.
These two ratios are often used on their own or in combination with other metrics to gauge certain characteristics. Dividing the A/D Ratio by the A/D Volume Ratio gives us the Arms Index.
Being a ratio, an index value of 1 indicates that the number of advancing and declining stocks are on-balance with the volume of trading for each respectively. If the scale is tipped one way or another, and trade volume does not seem to be following the movement of prices, it could indicate that there is an opportunity to make a play based on the presence of either too much or too little trade volume compared to the price action.
On the chart below, you can see how the TRIN indicator may cross over the 1 ratio and indicate the bearish direction for the security. A trader may see this and decide to sell a security or short it. As the $TRIN line falls and eventually falls below 1, it could be a bullish sign that the security is locked into an uptrend. A trader may consider buying the security or purchasing call options.
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Volume indicators can prove useful if, for example, there are fewer trades accompanying higher price jumps; there would seem to be more hype and less actual demand driving the price movement, and a trader could hypothetically expect a correction in this example.
Other popular volume indicators include the On-Balance Volume and Chaikin Oscillator. On-Balance Volume (OBV) is a popular leading indicator introduced in the 1960s by Joe Granville. OBV is a line built using differences between daily trading volume – in Granville’s estimation, the major driver of market behavior – adding the difference on days that the market or stock moves up and subtracting the difference on days when the market or stock moves down. It looks for instances of rising volume that should correlate with price movement, but price movement has not occurred; additionally, OBV can be used to confirm lag.
Traders use technical indicators like the Arms Index or On-Balance Volume to make predictions about future prices. No single indicator works well for all securities, but they can be very useful if used in conjunction with other tools, like Tickeron’s artificial intelligence offerings. A.I.dvisor can provide trade ideas, help traders confirm trends, analyze signals to execute advantageous trades, and assist investors with making rational, emotionless, and effective trading decisions.