Mass Index was created by Donald Dorsey. He described it the "Technical analysis of Stocks and Commodities" magazine, Jun 1992. Mass Index main idea is to identify possible trend reversals in advance, so it is a countertrend indicator - oscillator.
The formula for Mass index calculation looks like follows:
Mass Index = ∑ [EMA9 (H-L)] / {(EMA9 [EMA9 (H-L)]}
The process of calculation:
1. Calculate EMA9 of the High – Low differences
2. Calculate EMA9 of EMA9 we got in the step No. 1
3. Divide EMA 9 from the step No. 1 by EMA9 we got in the step No. 2
4. Sum up alll the values from the step No. 3 for a chosen period of time (usually 25 days)
The higher the Mass Index value is, the higher the Trading Range is and vice versa. The theory behind Mass index says that trend reversals can be expected mostly when the Trading Range rises more and more.
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How to use the Mass index:
Donald Dorsey recommended to wait for "Reversal Bulge", that indicates trend reversal. Mass Index can lead us to appropriate moments of going Long/Short mostly in case its values fulfil two main conditions:
1. Mass Index rises above 27 („Setup line“)
2. Consequently it falls bellow 26.5 („Trigger line“).
If both conditions are met, we get a signal to Buy or Sell. Whether to go Long or Short we can find out from an additive indicator, e.g. EMA. It is recomended to use EMA9 mostly. If it rises, the trend is rising as well. If it falls, there is an Downtrend on the market.
Beware: The Mass index is used as a Countertrend indicator! It means: If EMA9 rises and Mass index gives us a possible trend reversal signal - reversal Bulge, we go Short! Should EMA9 fall and MI gives us a signal, we go Long!
Note: Mass Index can identify possible trend reversal a couple of days before it really comes. It means the trader should know the indicator well to enter the trade at the right time. He should also set the right moment of Exit in advance. Mass index can generate a lot of inaccurate trend reversals so it is allways better to use it in conjuction with another indicator to confirm the trades.
If you are interested in a deeper study of this technical indicator and prefer ready to serve solutions, this section may be of interest to you. There you can find all the available indicators in Excel file for download.