More About the Arms Index

Editor's Note: Ever since Dick Arms officially debuted on RealMoney, we've been inundated with requests for a tutorial about his methodology. We asked him for help, and he happily obliged. Therefore, here are more details about the Arms Index, also known as the TRIN. We hope you find it helpful.

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What exactly is the Arms Index?

It's a calculation that compares the number of up stocks to the number of down stocks at a given time and simultaneously relates that comparison to advancing and declining volume. I invented this indicator, also commonly known as TRIN, in 1967.

What does it indicate?

It tells you whether advancing stocks are receiving more or less than their fair share of the volume, enabling you to sense the internal pressures of the market. It can be used as a tool to predict probable market direction over a wide range of time spans.

Where can I find it?

It appears each day in The Wall Street Journal and each week in Barron's. It's carried on most quotation systems, sometimes as "ARMS" and sometimes as "TRIN." It also frequently crosses the CNBC ticker.

How is it calculated?

The formula is as follows:

Arms Index = (Advances/Declines) / (Advancing Volume/Declining Volume)

As an example, let's say it's partway through the trading day and the New York Stock Exchange is showing the following statistics:

Number of stocks up for the day: 1,776

Number of stocks down for the day: 1,072

Volume on advancing issues: 413,068,000

Volume on declining issues: 174,259,000

Dividing advances by declines (1,776/1,072) gives you 1.66.
Dividing advancing volume by declining volume (413,068,000/174,259,000) gives you 2.37.
Dividing the first result by the second (1.66/2.37) gives you an Arms Index reading of 0.70.

What does the reading tell me?

An index of 1.00 is a standoff, indicating that both advancing stocks and declining stocks are receiving their share of volume. A value over 1.00 is bearish, indicating that declining stocks are receiving more than their fair share of volume. A value below 1.00 is bullish, indicating that advancing stocks are receiving more than their fair share of volume.

Normally, the index fluctuates around 1.00 -- somewhere between 0.65 and 1.75. We've seen days with an index as low as 0.19 and higher than 10.00, but those were rare occurrences when traders were reacting to extremes in euphoria or fear.

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Richard Arms is a renowned stock market technician who invented the Arms Index (often referred to as the TRIN), which has become a mainstay of market analysis, appearing in The Wall Street Journal and Barron's. Arms also developed the widely used technical method Equivolume Charting. Since 1996, he has been publishing the Arms Advisory newsletter for money managers and financial institutions. He also has authored four books, including Profits in Volume and Trading Without Fear, and has been honored with the Market Technicians' Award for Lifetime Contribution to Technical Analysis. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks.

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