Suppose you want to make a list that compares the advancing issues to the declining issues in the foreign exchange market. Alongside, you are interested in the trading volume so you use it as an indicator of the market sentiment, as well as the levels of supply and demand. And, you prefer to accomplish all these tasks on an intraday basis. In such a case, why not be familiar with the Arms Index? It’s recommended to you.
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The Arms Index 101
The Arms Index is a volume-based indicator; it was developed by the popular intraday trader, Richard Arms, in 1967. It allows you to gauge market strength and market breadth by interpreting the advancing issues and declining issues; if the 2 subjects come with relative value and volume, their relationship can be determined.
Another name for the Arms Index is TRIN (i.e. an acronym for “TR”ading “IN”dex). It follows that the result of the indicator can be used to study market conditions. While those that return values below 0 are indicative of bullish conditions, index values that are above 0 are indicative of a bear market. And, if the values remain in the 0 line, it is suggestive of a balanced market.
Calculating the Values
The calculations for the Arms Index start by observing market activity and identifying 4 values: (1) advancing issues, (2) declining issues, (3) volume of advancing issues, and (4) volume of declining issues. Once all the values are identified, you can begin.
The Arms Index requires a result from 2 equations. For the 1st equation, divide the advancing issues by the declining issues; for the 2nd equation, divide the volume of advancing issues by the volume of the declining issues. Finally, divide the quotient of the 1st equation by the quotient of the 2nd equation.
**representations: AI = advancing issues; DI = declining issues; AIV = volume of advancing issues; DIV = volume of declining issues
The formula:
TRIN = (AI ÷ DI) ÷ (AIV ÷ DIV)
Important Considerations
While it is a reliable volume-based indicator and market activity analyzer, the Arms Index can yield problematic values if certain considerations are not kept in mind. Specifically, in the event that the trading volume is insufficient, making a calculation is rather impossible, since 0 volume is suggestive of an undefined equation. However, granted that you take note of possibly flawed results, and you know your way around market activity, you can expect great trading days with the particular indicator.
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