by William Mason
Have you ever noticed how strong market moves are reported in terms of ratios? "It was a 3-to-1 up
day on advance to decline" or "It was a 10-to-1 down day on volume." Ratios inherently give the relative
relation of one variable to another. In other words, an advance/decline of 3-to-1 means there were 200%
more advancing issues than declining issues.
It struck me as odd that I could not find a true indicator based on a ratio. You may be thinking, "What
about the ARMS Index (TRIN) or the Relative Strength Index (RSI)?" They're both ratios aren't they?"
The ARMS Index is based on a ratio (see "Volume indices" in this issue), but RSI is an oscillator.
What I wanted was an algebraic accumulation of net changes. The popular Advance-Decline Line has
been erroneously called a "ratio index" and is really just the difference between the variables. A ratio is
one variable divided by another, Y/X, for example. If Y and X have the same ranges, then the data will
oscillate around the value of 1.0. Depending on the variables, you can define values above 1.0 as bearish
and below 1.0 as bullish, as is done with the ARMS Index: