Arms Index (TRIN): How to Use Arms Index TRIN

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.

What Is the Arms Index (TRIN)?

The indicator fluctuates above and below 1.0 and gives an indication of short-term overbought and oversold levels in the index’s price.

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.

All charts created using StockCharts.com

TRIN and NYSE Index
Figure 1. TRIN and NYSE Index

TRIN gives data on the NYSE and TRINQ gives data on the Nasdaq. 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.

How TRIN Is Calculated

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.

TRIN = (Advancing Issues / Declining Issues) / (Advancing Volume / Declining Volume)

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. Advancing Volume is the summed volume of all Advancing Issues; Declining Volume is the summed volume of all Declining Issues.

The first part of the equation is known as the AD Ratio, or Advance/Decline Ratio. 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. It is available on many charting and trading applications—no manual calculation required—as an indicator, or it can be viewed as a symbol ($TRIN on StockCharts.com and FreeStockCharts.com).

How to Read the TRIN

A reading of 1.0 is a neutral point, and the indicator moves above and below it. 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. Reversals don’t need to be assumed; the TRIN tips us off and then we wait for price to confirm before acting.

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 2013 and August 2014, a reading of 2.0 or higher typically indicated a short-term bottom was close at hand, and the price was due for at least a bit of upside movement.

High NYSE TRIN Indicates Oversold NYSE Prices
Figure 2. High NYSE TRIN Indicates Oversold NYSE Prices

When the Indicator is above 1.0 but below 2.0 it indicates selling pressure, and a short-term downtrend may be in effect. During such times, short-term short trades are preferable to long trades.

When the indicator is below 1.0 it indicates buying pressure and a short-term uptrend may be in effect. During such times, short-term long trades are preferable to short positions. Given that there is so much “noise” around 1.0, price analysis must also be used to determine direction and filter out false signals in the TRIN.

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 0.5 indicates a short-term top in price may be in place or close at hand.

Low TRINQ Indicates Overbought Nasdaq Price
Figure 3. Low TRINQ Indicates Overbought Nasdaq Price

When the TRIN is right around 1.0 it doesn’t provide much information. 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 1.0 by two-tenths or more.

See also Trend Trading 101

TRIN Uses & Strategies

Use oversold levels on the TRIN to confirm entry points during an overall uptrend. Define the uptrend using a 100- or 200-day moving average. Look for the TRIN to reach 2.0 or higher to signal an oversold level in the price. Enter long as soon as the price starts to show strength again and the TRIN reverses back below 2.0.

Trading Uptrend with Oversold TRIN
Figure 4. Trading Uptrend with Oversold TRIN

The same approach is applied to a downtrend. Wait for rallies in price where the TRIN reaches 0.5 or below. Once the price begins to move higher, and/or the TRIN moves above 0.5, look to enter a short position with a stop loss just above the recent high.

Since this trending approach attempts to capture the next wave of the trend, there isn’t a specific price target. 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 1.0 to show there is buying pressure (but not below 0.5, as that would indicate the price may be overbought). 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 1.0 showing buying pressure, and at the point of breakout the TRIN is right near 1.0. 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 1.0. 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.

TRIN and Breakout
Figure 5. TRIN and Breakout

The same concept applies to downside breakouts. TRIN is above 1.0 just prior to or at the time of breakout, and ideally the breakout is in the direction of an overall trend.

TRIN Limitations

Overbought and oversold levels are not exact levels. The TRIN can move well beyond these extremes before a price reversal occurs. Also, just because an overbought or oversold level is reached doesn’t mean the price will reverse.

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 200- or 100-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

The Bottom Line

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.