What is the mass index?

What does mass index mean? In this article we will look at the mass index definition within the realm of trading. 

In technical analysis, the Mass Index is an indicator that identifies price trend reversals by examining the difference between the high and the low of the trading range over a certain period of time.

The index signals that the current trend is likely to reverse when the range widens beyond a certain point and then contracts.

How to use the mass index on a chart?

Donald Dorsey developed the Mass Index indicator in the early 1990s. Dorsey focused on the so-called ‘bulge’ to indicate a price trend reversal when using mass index for trading.

According to the analyst, when the difference between the high and low results in a figure above 27 and then falls to below 26.5, the price is set to change its course.

An index reading of 27 marks a volatile stock, prompting traders to lower their baseline when a price bulge is present.

A downtrend followed by a reversal bulge, in theory, would indicate a positive trend reversal. An upswing followed by a reversal bulge, on the other hand, would indicate a bearish trend reversal.

Mass index formula calculation

To calculate the mass index use the formula below.

The steps for calculation of mass index are as follows:

1. Calculate the nine-day Exponential Moving Average (EMA) of the difference between high and low stock values during a given period. This is typically set at 25 days.

2. Divide the result by the moving average's nine-day Exponential Moving Average, which is presented in the numerator of the calculation.

The bulge is not an indication of direction. However, the nine-day prime moving average can be used to determine whether the bulge is a buy or sell signal.

Other factors

Even though Dorsey set the bulge threshold at 27, users should consider lowering it to provide more signals. Users should also use other technical indicators to complement the mass index in conducting technical analysis.

Apart from measuring stock price volatility, the reversal bulge in the mass index can offer insight into the market circumstances. You can also use the mass index to trade trend continuation.

The Mass Index indicator can be easily tweaked for sensitivity or based on specific periods concerning market volatility depending on the stock, making it ideal for short-term trading.