E-mini Trading And The Arms Index

If you have read any number of articles that I have written

, you realize that I have an interest in e-mini contract volume. I make no bones about my belief that volume is poorly understood by most traders and is an important variable in the supply/demand equation that determines e-mini price movement.

Richard W. Arms was one of the initial pioneers in technical analysis that took an interest in volume relative to price movement. Most of his work can be found in any library or on the Internet; pay particular attention to his well-received book being entitled Profits in Volume. In this book he sets forth the tenants of his equivolume style of charting and explains its intricacies in detail. Further, he introduces The Arms Index. At the time, the quote machine symbol for The Arms Index was TRIN or MKDS. (While I am in my middle 50s, I started my career on the old quotron machines and its antecedents) Needless to say, we didn't have the fancy computer number crunchers that are available to investors today and often drew our own trend lines with pen and pencil. Yikes!

The TRIN is still used by some e-mini traders, but I would not count the group using the TRIN as a large group. The TRIN measures the relative volume in advancing contracts versus declining contracts. The general line of thought is as follows:

If there is a heavy amount of volume in declining contracts, the market is likely at or near a bottom

Conversely, heavy volume in advancing contracts is usually indicative of a healthy trend.

One important aspect of The Arms Index is in reading it in chart form. A new rising number usually indicates a weakening market. For example, a reading greater than 1.0 is considered a bearish signal, and incrementally lower levels on the index indicate a more promising market. In recent years, market technicians have come up with a bevy of alternative methodologies to implement The Arms Index. This is due partly to the fact that the Arms Index was originally developed to measure issues in the stock market as opposed to stock indexes like the e-mini. For example, one group of researchers has found that a reading above 1.0 is a great indication for a short term buy. In short, The Arms Index is an indicator to be slowly integrated into your trading so that you can develop an effective and consistent understanding of its implementation in your trading system.

In summary, we have taken a short look at The Arms Index or TRIN and looked at its history and possible uses. I have cautioned that this particular indicator should be worked slowly into your trading system in order to fine tune its implementation in a positive manner. Nonetheless, this indicator has variable uses and still enjoys wide implementation by many individual traders.

by: David S Adams

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