Understanding the Mass Index
The Mass Index is a technical indicator designed to measure price volatility. Introduced by Donald Dorsey, it's primarily used to anticipate trend reversals based on a pattern called the "reversal bulge".
How Mass Index Works:
The indicator focuses on the range between high and low prices. The wider the range, the higher the Mass Index value, implying greater volatility.
- First, determine the price range by subtracting the daily low from the daily high.
- Calculate a 9-day exponential moving average (EMA) of this range.
- Divide the 9-day EMA of the range by a 9-day EMA of the 9-day EMA of the range.
- Finally, sum the values over a 25-day period to get the Mass Index value.
How to Use the Mass Index:
- Reversal Bulge: Donald Dorsey suggests that a reversal is likely to occur when the Mass Index goes above 27 and then falls below 26.5.
- Volatility Tracking: A rising Mass Index indicates increasing volatility, while a decreasing Mass Index suggests decreasing volatility.
Example:
Imagine a stock's high and low prices over a 9-day period fluctuate significantly, causing its Mass Index to surge past 27. After a few days, the Mass Index drops below 26.5. This formation, termed as the "reversal bulge", would suggest a potential reversal in the current trend.
Remember, while the Mass Index can provide insights into potential reversals based on volatility patterns, it should be used alongside other technical analysis tools to make informed trading decisions. Always consider practicing with these tools in a simulated environment or with a demo account before applying them to live trading.