Experimenting with the Mass Index can be tough for trading novices. But we’ll cover what it is, how it’s calculated, and more to help you get started!
The Mass Index examines the difference between a security’s high and low prices across a period of time. It’s considered a volatility study: when it rises beyond a specific point and falls below it again, this is usually taken as an indication of an approaching trend change.
As with a lot of technical analysis indicators, the Mass Index was created to be applied to the daily chart. However, a trader can utilise it with any timeframe they wish.
How is the Mass Index Calculated?
Four steps are involved in Mass Index calculations:
- The calculation of a 9-day EMA (exponential moving average) of the difference between high and low prices throughout a specific timeframe.
- The calculation of a 9-day EMA of the moving average resulting from the step above.
- The division of the EMA achieved in the first step by step two’s EMA.
- Add step three’s values for the number of periods intended.
The number of periods in the fourth step is usually set at 25 by default, so you’re summing 25 periods to reach the calculation, though you can change this in your charting platform’s settings.
Interpreting the Mass Index
The Mass Index was created by Donald Dorsey. He posited that once it reaches beyond 27 and then falls to below 26.5, this may indicate a reversal in a trend.
However, the levels involved can differ based on the market being traded: 27 on a Mass Index would suggest a security was quite volatile, though some are more so than others.
A security with higher volatility could need to have a threshold set above 27 to warrant the same interpretation. Similarly, a security with less volatility may need the threshold to be set at a lower level.
The Mass Index is considered unique as it aims to find possible points of reversal beyond the standard analysis methods of transforming price and volume. While a trading range can be closely linked to volume and price, the Mass Index is based on trading ranges which don’t focus on either exclusively.
Furthermore, as the Mass Index can highlight a possible trend shift, it reveals nothing of the direction in which it’s moving. This is why traders are best to use the indicator alongside additional tools (e.g. fundamental analysis, technical indicators) to gauge more accurately where a price is likely to move. This will also help to safeguard against signals that could be false.
The Mass Index is intended to locate possible price reversals in a market through analysis of its trading ranges. It’s calculated by dividing an EMA of trading ranges and dividing it by double EMA, before summing the totals across a defined timeframe.
An increasing Mass Index shows that the trading range’s rate of change is dropping (the trading range’s magnitude is getting less volatile), and is likely to lead the price to trend in one way or another. This is based on an assumption that low volatility has a significant probability of triggering higher volatility.
Originally, possible trend reversal indications were characterized as a break beyond level 27 and a plunge back beneath the 26.5 point.
Remember: the Mass Index offers no indication of the trend’s likely trajectory in the future, if a change is actually going to occur, whether this relates to a shift from positive to negative, sideways to positive, etc.
It can also lead to false signals, so the Mass Index should be utilized in combination with additional indicators. This will boost the accuracy of any trading system in which it’s used.