The Arms Index is a market indicator that shows the relationship between the number of stocks that increase or decrease in price (advancing/ declining issues) and the volume associated with stocks that increase or decrease in price (advancing/declining volume).
It is calculated by dividing the Advance/Decline Ratio by the Upside/Downside Ratio. The Arms Index was developed by Richard Arms in 1967. Over the years, the index has been referred to by a number of different names. When Barron’s published the first article on the indicator in 1967, they called it the short-term trading index. It has also been known as TRIN (an Acronym for Trading Index), MKDS, and STKS.
The Arms Index is primarily a short-term trading tool. The Index shows whether volume is flowing into advancing or declining stocks. If more volume is associated with advancing stocks than declining stocks, the Arms Index will be less than 1.0; if more volume is associated with declining stocks, the index will be greater than 1.0.
The Arms Index is calculated by first dividing the number of stocks that advanced in price by the number of stocks that declined in price to determine the Advance/Decline ratio. Next, the volume of Advancing stocks is divided by the volume of declining stocks to determine the upside/Downside ratio. Finally, the Advance/Decline ratio is divided by the Upside/Downside Ratio.
An Index value of 1.0 indicates that the ratio of up volume to down volume is equal to the ratio of advancing issues to the declining issues. The market is said to be in neutral state when the index equals 1.0, since the up volume is evenly distributed over the advancing issues and the down volume is evenly distributed over the declining issues.