Indicator insight: (Arms Index) TRIN

©2000, Reprinted with permission of Active Trader magazine (www.activetradermag.com)

The TRIN (short for TRading INdex) is an indicator developed by Richard J. Arms that uses the number of advancing stocks vs. the number of declining stocks, and the volume of advancing stocks vs. the volume of declining stocks to highlight bullish and bearish momentum in the market, as well as overbought and oversold points.

Basically, the TRIN indicates whether trading volume is concentrating in advancing or declining issues. It can be calculated on a daily basis, but it is also commonly calculated on intraday data. Figure 1 (right) shows an intraday chart of the New York Stock Exchange (NYSE) index and the TRIN. Figure 2 (opposite page) shows a daily NYSE/TRIN chart, including a 10-day moving average of the TRIN.

Calculation

The TRIN is the ratio of advancing issues to declining issues divided by the ratio of advancing (up) volume to declining (down) volume. The formula is:

(Advancing issues/declining issues)/(Advancing volume/declining volume)

The commonly referenced TRIN is based on NYSE stocks, but the same indicator can be calculated for any index or exchange (i.e., Nasdaq stocks).

Table 1 (below) shows the calculation of the TRIN indicator given different hypothetical advance-decline and up-down volume numbers.

Click here to view Table 1: Calculating the TRIN

Interpretation/application

TRIN essentially measures market “breadth” (advancing issues compared to declining issues) relative to the volume flowing into those issues. Basically, more advancing issues (and more volume flowing into those issues) is bullish. More declining issues (and more volume flowing into those issues) is bearish.

A TRIN reading of 1 is considered neutral because the ratio of advancing issues to declining issues is the same as the ratio of up volume to down volume (see Table 1). TRIN readings greater than 1 (especially when the indicator is above 1 and rising) are generally bearish, while readings less than 1 (especially when the indicator is below 1 and falling) are generally bullish.

However, extremely low or high TRIN readings are often indications of an overbought or oversold market, respectively. These kinds of momentum extremes are illustrated by the TRIN spikes in Figure 2, which reflect a high number of declining issues and/or high down volume, accompanied by bottoms in the NYSE index.

Key points

Because of its choppiness, a moving average is often used to smooth out the TRIN’s oscillations and better reveal the underlying momentum trend. A 10-period moving average is commonly used, as shown in Figure 2, although shorter or longer averages can be used to create a more or less responsive indicator. Notice in Figure 2 that the moving average better reveals the market’s momentum, and that it generally has an inverse relationship to the market action: It rises when the market is declining and declines when the market is rising. (One of Arms’ TRIN interpretations is that the market is overbought when the 10-day TRIN moving average falls below .8 and oversold when the average rises above 1.2.)

TRIN readings should be interpreted in the context of the prevailing market trend. For example, in strong bullish phases, TRIN readings may be exceptionally low and remain that way for quite a while (similar to the way momentum oscillators such as the relative strength index [RSI] or stochastics will remain overbought or oversold for extended periods during strong uptrends or downtrends). Accordingly, such a reading may not necessarily be the indication of an overbought market, but rather one that is exhibiting strong upside momentum.

Bottom line

The TRIN measures the internal strength or weakness of the market by comparing the advance-decline ratio to the updown volume ratio. It can be used to help gauge the upside or downside momentum of the market, as well as signal potential overbought and oversold markets when it reaches an extreme low or high level. In this capacity, the indicator must be used with caution, because like momentum oscillators, strongly trending markets can generate repeated or prolonged “overbought” or “oversold” signals that are really indications of exceptional strength or weakness.

For further research:

• Richard W. Arms, Jr., The Arms Index (TRIN)
(1989, Marketplace Books/Traders Library)

• Richard W. Arms, Jr., Trading Without Fear:
Eliminating Emotional Decisions with Arms Trading
(1996, John Wiley & Sons, New York)