Richard Arms developed the TRIN, or Arms index, as a contrarian indicator to detect overbought and oversold levels in the market. Because of its calculation method, the TRIN has an inverse relationship with the market. Generally, a rising TRIN is bearish and a falling TRIN is bullish. Sometimes you will see the scale of the TRIN inverted to reflect this inverse relationship.
The TRIN is the advance/decline ratio divided by the advance volume/decline volume ratio:
((Advancing issues/declining issues) / (advancing volume/declining volume))
Examples of TRIN calculations:
In the first example, the ratios were equal and the TRIN was 1, which indicates a standoff. Volume flowing into advancing stocks was virtually equal to volume flowing into declining stocks. In the second example, the up volume/down volume ratio did not keep up with the advance/decline ratio and the TRIN rose above 1. A TRIN above 1 indicates that the volume in declining stocks outpaced the volume in advancing stocks. In the final example the TRIN was below 1, indicating the volume in advancing stocks was healthy and outpaced the volume in declining stocks.
A number of TRIN interpretations have evolved over the years. Richard Arms, the originator, uses the TRIN to detect extreme conditions in the market. He considers the market to be overbought when the 10-day moving average of the TRIN declines below .8 and oversold when it moves above 1.2. 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.
Founder of the TRIN
Richard W Arms, Jr., is a financial consultant to institutional investors and a private portfolio manager based in Albuquerque, New Mexico. He is a noted expert in the field of technical and market analysis, the 1995 winner of the prestigious Market Technicians Award and the author of several best selling books and articles on his ground breaking theories in volume analysis and market forecasting. This key technical tool for understanding market price movement is listed daily in the Wall Street Journal and is flashed once a minute on CNBC.
Richard Arms’ revolutionary theories have changed the way investors perceive the market. His expertise in the field of technical analysis has had significant impact, evidence of this fact is his Equivolume charting system is now part of the most popular stock and futures software, and his Arms Index – also known as the Short-Term Trading Index or TRIN – has become one of the most important technical tools of Wall Street.