TRIN index

Advance/Decline Technical Analysis (Breadth Analysis)

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: S&P 500 TRIN (Arms Index). Indicator Calculations based on Hypothetical Examples.

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.

Conclusions:

Technical Analysis based on the TRIN indicator has 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.

The table below shows the TRIN readings and sentiment:

The TRIN Arms Index is considered as intraday indicator, in technical analysis it is usually watched during a trading session to see the possible trend development during the day. On the chart below you may see an example of TRIN indicator on the intraday 1-minute NYSE Composite index chart.

Chart #1: NYSE Composite intraday TRIN index chart. 1 bar = 3 minute

By V. K. for MarketVolume.com