TRIN (Arms Index) Trading Strategy: Exploring the Concept and Conducting a Backtest

Technical indicators help us analyze stocks to know how to trade them, but they focus on the external price action of individual stocks. While this is not bad in itself, knowing the general market sentiment is equally important. This is where the Arms Index comes in. But what is the index about?

The Arms index or short-term trading index (TRIN) is a market sentiment indicator that helps gauge the internal strength or weakness of a market. It compares the number of increasing and decreasing stocks (AD Ratio) to the increasing and decreasing volume (AD Volume).

At the end of the article, we make a backtest of a TRIN Arms Index trading strategy. Let’s get going.

What is the Arms Index (TRIN)?

The Arms index or short-term trading index (TRIN) is a market sentiment indicator that helps gauge the internal strength or weakness of a market. It compares the number of increasing and decreasing stocks (AD Ratio) to the increasing and decreasing volume (AD Volume). The indicator is seen as a measure of market velocity and mass because it factors in both the increase and decrease in price and volume.

It is used to know the general direction of the market. Arms Index is an oscillator-type technical indicator that is basically used to spot short-term extreme conditions in the market. It does this by comparing increasing and decreasing stocks (also known as the AD Ratio) and increasing and decreasing volumes.

When the indicator shows 1.0, it usually indicates equality between the AD Ratio and volume. It means that the market is in a state of balance because the up volume is spread evenly over the increasing stocks and the down volume is spread evenly over the decreasing stocks.

As a popular view, most analysts see the Arms as bullish when the reading is below 1.0. This is because the volume of the average up stock is greater than the average down stock. As a matter of fact, the indicator has been found to be in a long-term balance below the 1.0 line. This is an indication of a continuous bullishness of the stock market.

However, when the indicator reading is greater than 1.0, it is seen as having a bearish bias because the volume of the average down stock is greater than the volume of the average up stock.

Furthermore, if the indicator is significantly greater than 1.0, it means there’s a big difference between long and short positions for the trading day. A reading of 3.0 typically indicates an oversold condition and that the market sentiment is dramatic. It could mean a bullish reversal is imminent. Whereas a reading below 0.50 is seen as overbought conditions and the bullishness might cool down.

As a trader, you should not only look at the reading of the indicator but monitor its changes throughout the day. It is important to take note of market extremes because they indicate a turning point in the market.

Who created TRIN?

The TRIN (Arms Index) was created by Rich