TRIN (Arms Index) has been developed to detect overbought/oversold levels and could be considered as one of the most complex technical studies from the group of Breadth (advance/Decline) indicators in its interpretation.

The TRIN indicator is based on the advance decline issues and advance decline volume data. The same as with other Breadth indicators, TRIN could be applied to the basket of stocks (indexes, exchanges, etc) and cannot be applied to a single stock. It is calculated as a ratio between advance/decline issues ratio and advance/decline volume ratio:

TRIN = [Advance Decline Issues Ratio] / [Advance Decline Volume Ratio]

where

Advance Decline Issues Ratio = [Advanced Stocks] / [Declined Stocks] and Advance Decline Volume Ratio = [Advanced Volume] / [Declined Volume]

Furthermore TRIN formula could be expressed in the following format:

TRIN = ([Advanced Stocks] * [Declined Volume]) / ([Declined Stocks] * [Advance Volume])

The TRIN values are always positive (above zero) and as a rule they are oscillating around 1. In technical analysis TRIN readings above 1 are considered Bearish and readings below 1 are considered Bullish. However, from the formula above you may see that Bearish TRIN readings could run to infinity, yet, Bullish TRIN values can ran to zero only. This is the first challenge of this technical indicator. In order to correctly see the indicator's values a technical analysts (trader) would need a chart with logarithmic scaling where he/she would be able to see values between zero and one as clearly as the values between 1 and 2000 for instance (2000 is approximate number of stocks listed on the New York Stock Exchange).

The second challenge is in the evaluating of the oversold levels. If for all indexes TRIN Bullish indications are in the range between zero and one and overbought levels for different indexes could be defined at similar levels, then TRIN Bearish oversold indication for the NYSE (the New York Stock Exchange) which has about 2000 stocks listed would differ from the oversold levels of the DJI (Dow Jones Industrials) index which has only 30 stocks in the basket.

The last challenge is hidden in the interpretation of the TRIN reading itself. Since the TRIN calculations are based on the ratio of ratios there could be several conditions when it could be below or above 1. It is much simpler when you have an indicator that has only one ratio in calculations. For instance, Advance/Decline ratio is below 1 when the number of the declined stocks overcomes the number of the advance stocks and it is above 1 when the number of advanced stocks is bigger than the number of declined stocks. In TRIN situation (ratio of ratios) it could be below 1 when

• The number of declining stocks is bigger than the number of advancing stocks and the declined volume is lower than advanced volume - AD issues ratio is less than 1 and AD volume ratio bigger than 1;
• The number of declining stocks is bigger than the number of advancing stocks and the declined volume is bigger than advanced volume, yet, the declined volume overcomes advanced volume not as strongly as declining stocks overcome advancing stocks: AD issues ratio is less than 1 and AD volume ratio less than 1 and AD issues ratio is less than AD volume ratio;
• The number of advancing stocks is bigger than the number of declining stocks and advanced volume is bigger than declined volume, yet, the advanced volume overcomes declined volume much stronger than advancing stocks overcome declining stocks: AD issues ratio is bigger than 1 and AD volume ratio is bigger than 1 and AD issues ratio is less than AD volume ratio.

Similar situation could be considered for TRIN values above 1. As you may see, analyzing 6 possible condition of TRIN could be more complex than the technical analysis of simple indicator that is based on two conditions only.