A good investor must be able to read short-term market fluctuations and act upon them accordingly. The ability to anticipate quick reversals is critical to the investor’s success in navigating short-term market activity, especially when coupled with other technical analysis tools designed to predict the direction that the security’s price will move. (Try out indicators on Tradingview.com)
The mass index indicator is one such tool specifically designed to identify sudden market shifts.
What is the Mass Index Indicator?
The mass index indicator harkens back to the early 1990s. It was invented by Donald Dorsey along with a number of other technical analysis tools.
The mass index analyses the difference between high and low stock prices over a set time period. To calculate mass index you must first determine the period of time your wish to examine. The industry standard is 25 days. From there, calculate the 9-day exponential moving average of the high/low price range for your chosen time period. The final step involves dividing your calculated 9-day EMA by the numerator divided by the 9-day EMA. The exact formula looks something like this:
25
∑ = 9-day EMA (high-low) ÷ 9-day EMA/9-day EMA (high-low)
1
If the value you get from the calculation exceeds a certain point then quickly drops below that point, you can reasonably predict that a reversal is about to occur.
Mass Index Indicator | Indicator Series Click To TweetWhat is the Mass Index Indicator Used For?
The mass index indicator is ideally-suited for predicting sudden market shifts and is often used as a tool by short-term traders. The wider the price range between high and low, the more likely it is that a reversal will occur. When the number balloons, usually past a pre-selected value of 27, then falls back below 26, a reversal is imminent. Day traders can use the mass index in conjunction with other tools to tell them when to exit a position.
Putting the Mass Index Indicator to Good Use
It is important to realize that the mass index indicator, at least as Dorsey envisioned it, is set at 27 as a measure of market volatility. The upper and lower thresholds can be adjusted to suit your purposes and the market conditions.
Ultimately, the indicator only tells when a reversal is likely to occur; it does not measure the direction the stock’s price will move. This particular instrument should always be paired with additional technical analysis tools in order to get a holistic picture of market movement.
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