Arms Index (TRIN) Definition & Trading Strategy
What is the Arms Index?
The Arms index, or the TRIN, measures the strength of market, not only in terms of the breadth of advancers to decliners but also takes into account the volume that is taking the market higher or lower. The indicator was developed by Richard Arms and was designed to show the trader whether or not the market was moving higher or lower with volume support or not. The lower the Trin, the greater the advancing volume in the market; a higher Trin indicates that there is more declining volume in the market.
How to Use the Arms Index in Day Trading
The most important item to note regarding the Arms index is that the trend of the arms is more important than any specific number that it prints. It is not advisable to fight the trend of the Arms index. If, at 1pm, you notice that the Arms index is making higher highs throughout the entire session, it is advisable to look for a good short entry. The opposite situation is true for a down trending Arms. One final note on the Arms is a very important one. When the Arms index reaches extremes on a closing basis, it warrants a counter move on the opening of the following days trading session. An Arms figure of greater than 2.0 on a closing basis gives the market a 90% chance to open higher the following session. Conversely, a closing Arms of .5 or lower indicates that the market has most likely put in a short-term top and will move lower on the opening of the next trading day.
The following graph is a good example of these principles at work using the S&P 500 graph. As you can see, an extreme Arms index reading should not be ignored, especially by a day trader.