Mass Index

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Introduction

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.

Trade Signals

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.

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Calculations

The formula for the Mass Index is as follows:

  • Determine the range for a specified interval:
    Interval High – Interval Low
  • Plot a 9 day Exponential Moving Average of the range seen in Step 1:
    EMA (High – Low)
  • Plot a 9 day Exponential Moving Average of the previous EMA:
    EMA [ EMA (High – Low) ]
  • Divide the second EMA by the first:
    EMA (High – Low) / EMA [ EMA (High – Low)]
  • Add each value for chosen interval (25 is the most commonly used).

Conclusion

In summary, the Mass Index indicator helps traders identify price reversals based on the difference between the high and low in each interval. When ranges expand to uncommon levels, probabilities start to increase which suggest that the current price action is over-extended. When the Mass Index is used in combination with a 9-period EMA, a “buy” signal can be seen when the EMA shows a downside cross. Alternatively, “sell” signals can be seen when the EMA crosses to the upside.