Every trader has their own style and with so many different charting options and indicators to choose from, it is little wonder that no two individuals are alike. However, there are some resources that are popular with the vast majority of traders and the Arms Index is one such example. Despite sounding like an inventory for weapons, the Arms Index is actually a way of measuring the market and helping to determine likely future movement by ascertaining where the strength lies.
The Arms Index, which is also known as TRIN in some circles (short for Trading Index) has been around since 1967 following its creation by Richard Arms. The indicator is based on volumes and analyses of market strength by comparing the relative numbers of both advancing and declining issues. The index can be used to both measure supply and demand for the intraday market as well as being used to analyze medium and long-term trades. The Index is permanently displayed on the central wall in the New York Stock Exchange while the market is trading.
The Arms Index is calculated using a deceptively simple formula involving the division of advancing and declining issues by advancing and declining volumes. The result can be smoothed further by the addition of a moving average. The length of the moving average will be determined by the type of trade; those in a short term market should use no more than a five day average while those looking to trade in the medium term should apply a 20 or 21 day calculation. Any trader staying in the market for the long haul should use a minimum of a 55-day moving average.
However, it is important to remember that the Index is based upon volume, not price. This means that a stock seeing significant numbers of shares being shifted will register more strongly than the same monetary value being traded in a high priced commodity. Of course, being able to calculate the result is only half the story; any trader must also understand what it means and how to apply it to help improve the chances of making a profit.
The general consensus of opinion is that a reading below 1 points to a bull market whereas a value above 1 means sentiment is bearish. A steady score of 1 would normally be interpreted as a neutral position. However, any reading approaching 2.5 is widely regarded as an indicator that a retracement is about to occur. Some traders also place more importance on the movement of the Arms Index indicator rather than an isolated value. A trend in one direction or another is often viewed as more significant than one solitary figure.
The Arms Index is a widely used indicator and has been around for many decades, being trusted by thousands of traders. However, while it has its clear benefits, it is never a good idea to rely on just one indicator, regardless of how well established it might be. Whether you are trading forex or stocks and shares, the best traders are those who understand how to interpret technical indicators and use a range of charts to help them pinpoint likely movement.
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