The Mass Index indicator is a technical analysis tool that provides information on possible trend reversals by measuring the changes in a trading range over a set period. It works on the premise that price behaves in a repetitive pattern, and a change in this repetitive cycle indicates a significant directional change in trend.
- The Mass Index is a technical analysis indicator that helps traders identify potential trend reversals and continuations.
- It works by calculating and comparing price differentials between high and low prices over certain periods making the Mass index rise with an increasing differential and fall with a decreasing differential.
- Price action reverses or continues in the same direction when price compression or expansion reaches a threshold.
- To forecast market reversals, the indicator is best when combined with other indicators.
In this piece, we unpack everything about the Mass Index indicator, its application to your trading strategies, the benefits, and finally, the limitations associated with the tool. Now let’s get right into it.
What is the Mass Index Indicator?
Designed by Donald Dorsey in the early 1990s, the Mass Index indicator primarily focuses on identifying potential trend reversals by analyzing changes in the range between high and low prices over a given period. According to his theory, the price always moves in repetitive cycles, creating a cyclical Average Daily Range (ADR).
However, a change in this repetitive pattern implies that a significant change in the market’s volatility is taking place. The difference in volatility points to an imminent reversal in trend as momentum in the prevailing direction fizzles.
During price consolidations, the range between high and low prices narrows. Conversely, during price expansion, this range widens. When price compression reaches a specific threshold, price action reverses. This becomes a trade entry opportunity in a new direction for those who use the Mass Index indicator.
When the price range between the high and low widens significantly, the mass index rises. Conversely, when the trading range narrows, the mass index falls.
Essentially, the Mass Index indicator measures the difference between a financial asset’s high and low prices over a certain period. It, therefore, helps spot trend reversals and trend continuations and enables traders to find trading opportunities.
How Does the Mass Index Indicator Work?
Getting to know how the Mass Index Indicator evaluates and calculates data to create its chart is optional. Still, it does help deepen our insight into its workings. To come up with its chart, the indicator first considers the number of periods – 25 in this example. However, the period can be altered to suit trading preferences.
After that, the indicator calculates the difference between the high and low prices in each candlestick for the number of periods in consideration. For the 25-period analysis, the indicator generates 25 unique results for each candlestick. Subsequently, it creates a 9-day exponential moving average (EMA) from the data set. Finally, it makes another 9-day EMA of the previously generated 9-day EMA. This new 9-day EMA is used to divide the previous 9-day EMA.
The Mass Index indicator calculation is summarized as follows.
The Mass Index indicator is displayed as a sub-chart indicator, with the lines rising and falling as the price compresses and expands. Normally, if the range narrows, the volatility is low, and the price is not likely to move sharply. Conversely, when the range widens, the volatility is high, and the price is likely to reverse.
At most times, the indicator’s line mainly falls between the +24 and +26 regions. However, the Mass Index indicator offers two forms of signals – a bulge and a reversal bulge.
Bulge – It shows a possible reversal when the line crosses the 27 threshold, creating a bulge. Essentially, it signifies when a trading range is widening, hence, volatility is rising, and there is an imminent change in price movement.
Reversal Bulge – A reversal bulge occurs when the Mass Index indicator rises above 27 and then drops significantly below 26.5. When this happens, you should consider entering a position in the opposite direction of the existing trend.
How to Use The Mass Index Indicator in Trading
When you pull up the Mass Index indicator on your chart, here’s how you would look to trade it:
The Mass Index indicator is primarily used by identifying the reversal hump signal. The reversal hump happens when the indicator crosses over the 27 threshold and returns below it to the 26.5 level. This signifies that a potential reversal is waiting to happen.
Note, however, that the reversal hump does not determine the trend in which the price is going to reverse. You’ll need to use other indicators or trading tools to determine this. The indicator just tells you when a reversal might happen. The direction of the reversal, however, would depend on the prevailing trend.
The Mass Index indicator is an oscillator. Hence, you can exploit a trading opportunity when it moves in the other direction of the asset’s price action. This is known as divergence.
So, when the price moves in a direction opposite to the indicator, that is a sign to enter a trade. However, there are different types of divergences, and to learn how to trade divergences, you must know the different forms of divergences. To learn more about it, we suggest you visit our divergence cheat sheet page.
Mass Index Indicator Trading Strategy Tutorial
As we mentioned earlier, you can combine the Mass Index indicator with other indicators for broader perspectives of market dynamics. In this example, we will show a trading strategy using the Mass Index with two Exponential Moving Averages of different periods. More specifically, we use the 9-period and 21-period EMAs.
Mass Index Trade Entry
First, launch your Mass Index indicator onto your chat. It displays below the price action chart as a sub-chart. The default period is 10. Then you launch your 21-period and 9-period Exponential Moving Averages on your price chart to confirm the signal given by the Mass Index indicator.
Wait for the Mass Index to rise to the 27 threshold level and fall below the 26.5 level. This is called the reversal hump. The indicator will denote this by making a reddish shadow.
Next thing is to trade the reversal of the moving averages. For instance, as you can see in the images below, if the moving averages were bullish (the 9EMA is above 21 EMA) during the reversal hump, make a bearish trade when the moving averages turn bearish (the 9EMA crosses below the 21 EMA).
Conversely, if the reversal hump happens when the EMAs signal towards a bearish upcoming trend, wait for a bearish crossover of the EMAs and sell.
When using the Mass Index indicator strategy, place your stop loss above or below the candlestick where the previous moving average reversals happen. So, in bearish trades, your stop loss would be above the candlestick, where the moving average lines give the bearish signal. And in a bullish trade, place your stop loss below the crossover candlestick.
An excellent way to profit with this strategy is to wait for a crossover of the two moving averages. When in a long position, take profit as soon as the fast 9-period moving average drops below the 21-period EMA (as seen in the image below). And to take profit from a bearish trend, wait for the 9-period SMA to cross above the 21-period SMA.
Mass Index Indicator – Pros and Cons
The Mass Index indicator is particularly useful for identifying trend reversals in the market. Combining it with appropriate indicators and tools can make a considerable profit. Still, it has some limitations that hamper its effectiveness. We discuss some benefits and limitations of the Mass Index indicator below.
Benefits of Using the Mass Index Indicator
Without a doubt, The Mass Index indicator is a unique trading tool that helps to identify when the momentum in a prevailing trend loses steam. Its successful mathematical formula has been proven accurate and reliable in identifying trend reversal. This can be useful in making further necessary trade decisions about whether to enter a trade. Some primary benefits of the Mass Index indicator are listed below.
- The Mass Index indicator excels at pinpointing potential trend reversals. This helps traders enter a trade early enough before the reversal
- The indicator is very straightforward to use and interpret. It means that all traders of different experience levels will find it handy
- The Mass Index indicator is versatile and can be applied to various asset pairs and timeframes, providing flexibility in trading strategies
Limitations of the Mass Index Indicator
The Mass Index is not a perfect stand-alone indicator. Therefore, reasonable consideration should be given to other indicators and tools before trading. Some limitations of the Mass Index indicator are as follows.
- As with many technical indicators, the Mass Index can send false signals, especially during a sideways or choppy market, leading to unprofitable trades
- The indicator is lagging. It relies on historical price data and may not respond well to sudden market changes like other leading indicators
- The indicator relies on other indicators to confirm the given signal
- The Mass Index indicator is valuable for traders seeking to identify potential trade trend continuations and reversals.
- By analyzing price range changes, it helps traders spot optimal entry and exit points in the markets.
- It shows a possible reversal when the line crosses the 27 threshold, creating a bulge.
- A reversal bulge occurs when the Mass Index indicator rises above 27 and then drops significantly below 26.5.
- As a trading strategy, the Mass Indicator works best in combination with double Exponential Moving Average.
Frequently Asked Questions About Trading the Mass Index Indicator
The following are some of the most frequently asked questions about the Mass Index Indicator.
What is the best way to trade the Mass Index indicator?
To best trade the Mass Index indicator, you must incorporate it into a comprehensive trading strategy. Relying on the indicator alone can lead to undesirable results. Therefore, combine the indicator with other tools such as moving averages, RSI, MACD, or Bollinger bands to improve the accuracy of trades and optimize profit.
What is the formula for the Mass Index indicator?
The formula for the Mass Index indicator works by calculating its 9-period exponential moving average and the exponential moving average of the high and low differential. Then, summing the ratio of these two over a given period (in default 25).
The value 25 in the formula above is an arbitrary number of periods put into consideration, which the indicator mainly uses. The value changes based on the preferred settings of the trader.
What other indicators can be used to confirm the Mass Index indicator signals?
To improve the reliability of the Mass Index technical indicator, traders can use any of the indicators listed below. These are the common indicators traders combine the Mass Index with.
- Moving Averages help traders identify the direction of trends and potential resistance and support levels.
- The relative Strength Index (RSI) helps measure the speed and change of price movement, which is essential for pinpointing overbought and oversold levels.
- Moving Average Convergence Divergence (MACD) provides trend-following signals and helps to identify bullish and bearish crossovers.
- Bollinger bands show volatility levels. Combined with the Mass Index, they can confirm potential price breakouts and breakdowns.