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Arms Index

The Arms Index, developed by Richard Arms, is a short-term trading tool which indicates whether volume is primarily associated with advancing issues ( Arms Index < 1) or declining issues (Arms Index > 1). Thus, the Arms Index illustrates changes in supply and demand. The Arms Index is calculated by taking a moving average of the Advance/Decline Ratio (Advancing Issues/Declining Issues) divided by the Upside/Downside Ratio (Advancing Volume/Declining Volume). The duration of the moving average depends on your trading time frame. Short term traders might use a 4 day moving average while long term traders might use a 55 day moving average, and other traders may use a duration in the middle of those two. The Arms Index is also used by traders to show overbought or oversold conditions in the market. The Arms Index is often referred to by different acronyms such as TRIN, MKDS, AND STKS.

Traders watch the direction of the Arms Index. When it is falling, it indicates a strong market; when it is rising, it indicates weakness. The Arms Index normally ranges from .5 to 2.0. When it is at 1.0, the market is in balance. When it is below 1.0, there is more volume in advancing issues than declining issues, so it is bullish. When it rises above 1.0, there is more volume in declining issues than advancing issues, so it is bearish.

However, extreme readings in either case may indicate an impending market reversal. Thus, the Index works as an overbought/oversold indicator. When it drops to extremely overbought levels, it is indicating an impending selling opportunity. When it rises to extremely oversold levels, it is indicating an impending buying opportunity.

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