Spurs face the Gunners on Sunday afternoon and while the club's first aim is Champions League qualification, the youngster says his team should look to overtake Manchester City
A win at White Hart Lane would leave Spurs seven points clear of the fifth-placed Gunners and well on course to finish in the top four and secure entry into Europe's top club competition next season.
While Andre Villas-Boas' side would consider that a huge achievement in his debut season in charge, January signing Holtby says the club can do even better and potentially catch Roberto Mancini's side to make it a fantastic campaign.
"I'm new to the club but I've played in derbies - Schalke against Dortmund, the mother of all derbies they call it, in front of 80,000 - we won that away this year, 2-1," he told reporters. "They [derbies] are emotional, they are great games but as a player you have to be cool in these games. We need to stay in third place and, maybe, have a little sniff at Man City. I want to be glorious with the club."
The Germany youngster agreed to move to Tottenham in the summer when his contract at Schalke was due to expire, but Spurs pushed through a January deal - and Holtby says having already played against Arsenal in Europe this season is a bonus.
"Mentally, for me, it's not bad to have gained four points against them," he continued. "We were 2-0 down at home and got it back to 2-2. At the Emirates we won 2-0. So it's good for my head that we can beat Arsenal as well. I think we have the quality to beat them, especially at home, but it's going to be an intense game."
The 21-year-old is still finding his feet in the Premier League but feels he is in the right country to improve his game, and praised his new boss Villas-Boas for the mental strength his gives to the side.
"I loved playing for Schalke but, for me, it was the perfect time to move to Spurs," he added. "I have made the right decision - my dream was always to play in the Premier League. In my position, in midfield, [Villas-Boas] gives me a free role and tells me to get involved. He's doing a real good job."