The Arms Index is a market indicator that illustrates the relationship between the number of stocks that increase or decrease in price (advancing/declining issues) and the volume associated with stocks that increase or decrease in price (advancing/declining volume). To calculate it, divide the Advance/Decline Ratio by the Upside/Downside Ratio.
The Arms Index is primarily a short-term trading tool, showing whether volume is flowing into advancing or declining stocks. A reading below 1.0 indicates more volume in rising stocks and is positive. A reading above 1.0 reflects more volume in declining issues and is negative. The Arms Index is a contrary indicator that trends in the opposite direction of the market. It can be used for intraday trading by tracking its direction and for spotting signs of short term market extreme.
The Arms Index was developed by Richard Arms in 1967. Over the years the index has been referred to by a number of different names. When Barron's published the first article on the indicator in 1967 they called it the Short-term Trading Index. It has also been known as TRIN (an acronym for Trading Index).
According to Arms, a 10 day average of the Arms Index above 1.20 is considered oversold, while a 10 day Arms value below .70 is overbought, although those numbers may shift depending on the overall trend of the market. Other interpretations seek to use the direction and absolute level of the TRIN to determine bullish and bearish scenarios. In the momentum driven markets, the TRIN can remain oversold or overbought for extended periods of time.