V.7:9 (278-281): Ratio accumulators by William Mason
Product Description
Ratio accumulators
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:
...
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:
...
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