The Mass Index indicator was invented by Donald Dorsey and uses the difference between
the high and low in a given interval to spot potential price reversals. The main
assumption is that prices tend to reverse when ranges widen beyond historical averages.
Since this difference is constantly changing (ranges are always widening and narrowing),
traders can use the Mass Index to generate trade signals, which occur when the index
line (typically 25 periods) moves above 27 and then drops below 26.5.
This index line is then plotted against a 9 day exponential moving average (EMA)
of the asset price. A “buy” signal is generated when a reversal signal
appears and the EMA crosses lower. Conversely, “sell” signals are generated
when a reversal signal is combined with an upward EMA cross.
It is important to remember that the Mass Index calculates intraday range values,
which is not the same as the asset’s “true range,” as price gaps
are not factored into the equation. Another central point is that the Mass Index
signal itself does not forecast future direction (only the likelihood that the current
trend will reverse). To determine price direction, we need to observe the behavior
of the 9 period EMA.