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This Arms index item is my third market breadth composite index. This first item I have uploaded, Advance Decline Ratio, calculates the ratio between the number of advancing stocks and the number of declining stocks. The second one, Absolute Breadth Index, calculates the absolute value of the difference between the number of advancing stocks and the number of declining stocks.
This composite is called Arms Index or TRIN. It is a widely used composite index developed by Richard Arms. It is calculated by dividing two ratios.
The first ratio is called A/D ratio (Advance Decline Ratio), and it is the result of the number of advancing stocks divided by the number of declining stocks.
The second ratio is called A/D volume, and it is the result of the number of advancing volume divided by the number of declining volume.
The TRIN values that result from this division (ratio1 / ratio2) cannot be lower than zero.
Interpretation of the Arms Index:
A value lower than one means that more trading volume goes into advancing stocks and this is considered bullish. A value higher than one means that more trading volume goes into declining stocks and this is considered bearish.
Another important interpretation of the Arms Index - TRIN is when it reaches extreme values. We already said that a value above one is bearish, but a high value (a value of 2.5 is considered high) could indicate that a market reversal may come and this is of course a bullish sign. A very low value could also means that a market reversal is near. Therefore, the interpretation of the Arms Index can change depending on how high and how low its value is.
The TRIN data is so choppy that most traders use a moving average to smooth the Arms Index or TRIN time-series. The moving average period should be chosen depending on your style. If you are a short-term trader, you may choose a low period value. Long-term trader may choose a higher period value.
Arms index historical data generated by this composite starts in 2005 and continues to present. It uses A/D issues and volume data from the New York Stock Exchange, the American Stock Exchange and the NASDAQ. The composite symbol name is '_ARMS INDEX'.
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.