Arms index trading strategies
Created by Richard Arms in the '60s, TRIN stands for TRading INdex, but is also known as the Arms Index. It is a breadth indicator, helping highlight overbought and oversold levels in major indexes by looking at the number of advancing and declining stocks, as well as volume.
The indicator is also used for trading individual stocks, showing whether the broader market is strong or weak, which could impact the stock price. The indicator fluctuates above and below 1. It combines how many stocks are advancing and declining, as well as the volume of these stocks to provide a short-term gauge of market health. TRIN gives data on the NYSE and TRINQ gives data on the Nasdaq.
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Both are used depending on which exchange is most applicable to the stocks being traded. If trading a financial stock then TRIN would be a better indicator. If trading a technology stock, following TRINQ and the Nasdaq Composite Index is likely more applicable. TRIN often appears to move inversely to the price action of the index it is being applied to. The indicator can be calculated for any index or exchange for which there is adequate data. It is often used to gauge the NYSE or Nasdaq.
Advancing Issues is the number of stocks that closed higher on the day and Declining Issues is the number of stocks that closed lower on the day.
Ultimate Guide to the Arms Index (TRIN)
Advancing Volume is the summed volume of all Advancing Issues; Declining Volume is the summed volume of all Declining Issues. The second part of the equation is known as the AD Volume Ratio. Calculating the TRIN index can be a daunting task, especially on short time frames such a one-minute chart.
A reading of 1. A strong up day for an index will push the TRIN down, and a strong down day for the index will push the TRIN up. Very high or low readings in the TRIN indicator signal that the price may be oversold or overbought, respectively, and due for a reversal.
Be sure to also read Trend Reversals: How to Spot and How to Trade. Specific overbought and oversold levels may vary slightly by index. For the NYSE Index between August and August , a reading of 2.
When the Indicator is above 1. During such times, short-term short trades are preferable to long trades.
Why is the Arms Index (TRIN) important for traders? | Investopedia
When the indicator is below 1. During such times, short-term long trades are preferable to short positions. Notice that the spikes lower are not as pronounced as the spikes higher on TRIN. This can make it difficult to pinpoint an exact overbought level.
Usually a reading below 0. When the TRIN is right around 1. Look at the longer-term price action to determine trend direction and in which direction trades should be made; TRIN is most useful when it is above or below 1.
Use oversold levels on the TRIN to confirm entry points during an overall uptrend. Define the uptrend using a or day moving average. Look for the TRIN to reach 2. Enter long as soon as the price starts to show strength again and the TRIN reverses back below 2. The same approach is applied to a downtrend. Wait for rallies in price where the TRIN reaches 0. Trailing stops, profits targets or indicators can be used to aid in exiting a profitable trade see 3 Ways to Exit a Profitable Trade.
TRIN can also be used to confirm breakouts in stocks that are typically correlated with the broader market.
Ideally, when the price breaks higher, the TRIN should be below 1. Buy when the price breaks above the pattern. Figure 5 shows the price breaking above a descending triangle pattern. Just prior to the breakout the TRIN was below 1. This provided enough confirmation of the buying pressure to trade the breakout. On the right of the chart another small range develops.
There is a strong up bar that corresponds with a TRIN value well below 1. This confirmation could have been used to enter a long position. Notice these breakouts both occur in the direction of the overall trend, which adds confidence to the trade setup. The same concept applies to downside breakouts. TRIN is above 1. Overbought and oversold levels are not exact levels. The TRIN can move well beyond these extremes before a price reversal occurs.
The TRIN , as described here, is predominantly a short-term indicator, used by day traders and swing traders. It can be used as a longer term indicator if the data is smoothed and averaged, say over 4, 21 or 55 periods. This can be done by applying a moving average to the indicator, and then focusing on the moving average reading.
Spikes will be smoothed out over a number of days and only the strongest overbought and oversold will appear using the TRIN moving average. Given that it is naturally a short-term indicator, it is best to use the indicator in conjunction with overall trend analysis. Isolating the broader trend is up to the trader, but using a or day moving average can aid in finding the trend direction. The indicator can have erratic movements and therefore may not be an ideal indicator to use for exiting profitable positions.
The strategies above focus on getting you into a trending move; once that trend move has begun another method must be employed to exit the position with a profit. Be sure to also read 4 Ways to Exit a Losing Trade. TRIN is a market breadth indicator that looks at advancing and declining stocks on major indexes as well as the volume associated with those stocks. Extremely high values indicate the index may be near a bottom, while extremely low values indicate the index may be near a top.
These levels are not exact though and reversals may not occur just because an overbought or oversold level is reached. The indicator is also helpful with confirming price breakouts, but finding a price target or profitable exit will be up to the trader. TRIN can be erratic and therefore may not be ideal for exiting trades. Utilize a stop loss, and ideally trade in the direction of a longer-term trend, using TRIN to aid in trade selection and timing.
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Trading Indicators Ultimate Guide to the Arms Index TRIN. Cory Mitchell Aug 26, What Is the Arms Index TRIN? All charts created using StockCharts. How to Spot and How to Trade Specific overbought and oversold levels may vary slightly by index.
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