Indicators based on the "advances" and "declines" concept -
TRIN (Arms Index)
Richard Arms developed the TRIN indicator (which is also
known as the ARMS indicator) in the 1970s. The TRIN indicator is
calculated by dividing the Advances/Declines (AD) Issues Ratio by the AD
Volume Ratio. The formula for the TRIN indicator (or “TRIN”) is simple:
TRIN = (AD Issues Ratio)/(AD Volume Ratio)
Or to put it more specifically:
TRIN = ((Advancing issues/declining issues) /
(advancing volume/declining volume))
The TRIN was developed as a contrarian indicator with
the intent of pinpointing the critical levels at which a market becomes
“overbought” or “oversold”. Generally, a rising TRIN indicates bearish
sentiment and a falling TRIN indicates bullish sentiment. The TRIN
indicator may be applied to any index or basket of stocks. Some sources
refer to the TRIN indicator applied to the New York Stock Exchange
(NYSE) as the "NYSE Short Term Trading Index".
Table 1 provides three hypothetical examples of how
the TRIN is calculated. The examples are then discussed below.
Table1: TRIN (Arms Index). Indicator
Calculations based on Hypothetical Examples.
| |
Example #1 |
Example #2 |
Example #3 |
| Advancing Issues |
300 |
400 |
400 |
| Declining Issues |
200 |
100 |
100 |
| AD Issues Ratio |
1.5 |
4 |
4 |
| Advances Volume |
600 K |
700 K |
900 K |
| Declines Volume |
400 K |
300 K |
150 K |
| AD Volume Ratio |
1.5 |
2.3 |
6 |
| TRIN Calculation |
1.5 / 1.5 |
4 / 2.3 |
4 / 6 |
| TRIN Indicator Value |
1 |
1.7 |
0.67 |
Example 1:
The value of the TRIN indicator equals 1, reflecting a
neutral market sentiment. Per stock, we have an average volume of 2K –
regardless of whether those shares were part of the group of advancing or
declining issues (600k / 300 shares = 400 k / 200 shares).
Example 2:
Compared to example 1, there is a greater majority of
advancing issues here (a higher AD issues ratio), and the volume
distribution is more heavily skewed toward advancing stocks (a higher AD
volume ratio).
For each stock in the advances group, we have an average
volume of about 1.75k (700K/400). In contrast, per stock in the declining
issues group, we noted an average volume of 3K (300K/100). Thus, the stocks
in the declining issues group were more actively traded - an indication of
bearish sentiment.
Example 3:
As in example 2, we have an AD issues ratio of 4 (400
stocks advanced while merely 100 declined), yet what immediately stands out
in this third example is the very high AD volume ratio of 6: 900K shares
were traded in the group of advancing stocks, whereas only 150K shares were
traded in the group of decliners.
For each stock that is part of the advancing issues group, the average
volume was 2.25K shares (900K/400); in contrast, the average volume traded
per stock in the declining issues group amounted to only 1.5K shares
(150K/100). It becomes readily apparent that the stocks in the advancing
issues group were more actively traded than those in the declining group –
this signals a bullish market sentiment.
Analyses based on the TRIN indicator have evolved over the
years. Richard Arm’s original concept was to use the TRIN as an indicator for
detecting critical market levels. He assumed that a market was “overbought” when
the 10-day moving average of the TRIN declined below 0.8. Conversely, he
considered a market “oversold” when this moving average rose above 1.2.
Next
A. v. S.
V. K.
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