TRIN or Arms Index is a technical indicator used by traders to do short term stock market analysis and was developed by Richard W Arms during late 1960s. TRIN is acronym for the word TRading INdex. It is usually used for short term trading signals and is based on advance/decline ratio of the stocks and ratio of associated volume
Following is the formulae used to calculate TRIN
TRIN = (Advancing issues/Declining issues) / (Advancing volume/Declining Volume)
Usually TRIN value of 1 is considered as neutral, TRIN value greater than 1 is considered as bearish and less than 1 as bullish. During strong bullish market conditions the value of TRIN goes way below 1 and during strong bearish conditions the value of TRIN goes way above 1. Some traders use TRIN as oscillators and use it as part of technical analysis to identify overbought and oversold areas.
Usually TRIN is smoothened by using a moving average as its movement is very volatile. Oversold and overbought areas varies from market to market and also depends on index composition. 1.2 and 0.8 TRIN values might be one possibility of oversold and overbought zones and for some markets it might be 3 and .5. Traders need to look into historical data and play around with various moving averages to come up with appropriate oversold and overbought territories.
One of the problem with TRIN calculation is sometimes a highly traded stock with low price range might affect the calculation more than a stock with high price range. Here number of shares traded is considered for calculation not the money value.