Mass Index

Definition

Mass index is a technical analysis indicator that is used to examine the differences between high and low stock prices over a specific period of time. The index proposes that a trend reversal may be imminent when there is a larger difference between stock prices, and then this difference recedes.

History

The mass index was developed and introduced by Donald Dorsey in the beginning of the 1990s. Dorsey initially thought that when the calculation resulted in a figure above 27 and then dropped a point and a half below (to 26.5), the stock would be ready to change direction. This result would create a “bulge” of sorts. It has been determined that an index of 27 showcases stock volatility, causing some traders to lower their baseline when expecting a price bulge.

Calculations

To calculate the mass index, check the formula below.

25
∑  9 − Day EMA of a 9 − Day EMA of (High − Low) / 9 − Day EMA of (High − Low)
1

The steps for calculation are as follows.

  1. Begin by calculating the nine-day Exponential Moving Average (EMA) of the difference between high and low stock prices for a specific period of time. This is usually determined as 25 days.
  2. Continue by dividing this result by the nine-day Exponential Moving Average of the moving average that is displayed in the numerator of the equation (shown above).

Takeaways and what to look for

While it is common to use indicators like standard deviation to measure volatility within the market, the mass index also has a lot to offer. Using the mass index’s reversal bulge function can shed some light on market conditions and can also be used to trade continuations of a trend.

Great for short-term trades, the mass index can be easily modified for sensitivity or based on specific periods in relation to market volatility depending on the stock.

Summary

The mass index is a tool for technical analysis that examines the range of difference between high and low stock prices over a particular period of time. A reverse in market trend may be clear if the range expands and then recedes to a different point.

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