✔️ Information reviewed and updated in December 2023 by Eduardo López
Technical indicators are used by traders to have a better perspective and better understanding of the market, since it is not easy to guess the direction of the cryptocurrency markets. An example is ARMS, a very popular indicator.
All indicators are tools that are available to be able to analyze the charts more precisely, and each one has different functionalities.
The ARMS Index Indicator, also called a short-term trading index, compares the number of stocks that advance or decline with the volume of those that also advance and decline. It is used to measure the general sentiment that the market has.
✨ ARMS Index definition
This indicator was invented in 1967 by Richard W. Arms Jr, and measures the relationship between supply and demand in the market. Its function is to predict the future of price movements, especially intraday (values that are traded in the markets during normal business hours).
It generates overbought and oversold levels, which indicate when the index and stocks tend to change direction.
The ARMS Index Indicator is moving in the opposite direction to the price trajectory, a strong surge in prices can cause it to move to lower levels. So a bearish index will cause the ARMS Index to go up.
✨ What is ARMS Index for?
The ARMS Index Indicator provides an easier explanation about the movements that occur in the compound value of the stock exchanges, through the analysis of the strength and amplitude of these.
When the value of the index is 1.0 it means that the proportion of the volume AD is equal to the proportion AD.
The market is in a neutral state when the index equals 1.0, for this reason the rising volume is evenly distributed over the advancing issues, and the falling volume is evenly distributed among the descending issues.
✨How to get it?
The ARMS Index Indicator is provided in most charting applications, and to obtain it mathematically you have to do the following:
First you have to divide the number of shares that advance by the number of declining shares (this is at established intervals, it can be done every five minutes or daily). Then, to obtain the volume AD, the total advance volume must be divided by the total decreasing volume.
Once you have both divisions, divide the proportion of AD (the first step) by the volume of AD (the second step). This result should be recorded and plotted.
The calculation must be repeated in the next time interval that was chosen, and connect several points on the graph to observe how it moves over time.
✨ What is your interpretation?
If the AD volume has a higher ratio than the AD ratio, it means that the ARMS Index indicator is going to be below one.
On the contrary, if the AD volume has a lower ratio than the AD ratio, it means that it will be higher.
The indicator is moving in the opposite direction to the index price trajectory, and a large price spike can cause the ARMS Index to move lower.