What is the Arms Index?

As one of the more commonly used market indicators that is used in the process of technical analysis, an arms index takes into consideration several factors that result in helping to determine if issues are to be considered bullish or bearish. Sometimes referred to as a trading index, the arms index is relatively easy to calculate when the data is readily available. Here is the process for arriving at an accurate arms index.

The process of factoring an arms index begins with assembling the data that is relevant to a particular set of issues. Basically, there are four pieces of information that are required to arrive at the arms index. First, the number of advancing issues is necessary to begin the formula. This figure is to be divided by the number of declining issues involved. Next, having the current detail on the total up volume for the issues, as well as the total down volume is required. Just as the first two components were divided into one another, so does the down volume divide the up volume. As a last step in the process the two figures are divided into one another, with the result of the advancing issues/declining issues divided by the result of the up volume/down volume.

The final figure of this process provides the arms index for a given set of issues. The actual final number helps to determine if the issues should be considered bullish or bearish. Bullish simply means that the anticipation is that the issues are about to rise in value. Bearish implies that the issues are expected to decrease in value within a short period of time. Generally, a trading index or arms index of one or more is considered bearish, while a figure of less than one is considered to be bullish.

Using this sort of formula to determine the arms index is a helpful way of determining whether or not an investment is working. Depending on the current arms index, it may be time for the investment to be abandoned and the resources from the sale of the issues placed into some other sort of stock, bond, or other financial enterprise. By the same token, the arms index may also indicate that the issues are about to take off in a big way, which will yield a great return on the investment. Because this sort of market indicator essentially works off the number of issues involved and the performance of the issues, the arms index is a reliable way to determine what steps the investor should take next in order to either minimize the loss or anticipate a return.