Mass Index
What Is Mass Index?
Mass index is a form of technical analysis that examines the range among high and low stock prices throughout some undefined time frame. Mass index, developed by Donald Dorsey in the early 1990s, proposes that a reversal of the current trend will probably take place when the range widens beyond a certain point and then, at that point, contracts.
Breaking Down Mass Index
By analyzing the narrowing and widening of trading ranges, mass index identifies potential reversals based on market patterns that aren't in many cases considered by technical analysts largely focused on singular price and volume developments. Nonetheless, since the patterns do not provide knowledge into the direction of the reversals, technical analysts should join the indicator's readings with directional indicators, similar to the A/D line, that specialize in predicting such things.
To determine the mass index, first calculate the nine-day exponential moving average (EMA) of the range between the high and low prices for a while — typically 25 days. Then divide this figure by the nine-day exponential moving average of the moving average in the numerator. The equation seems to be this:
Dorsey hypothesized that when the figure bounces above 27 — creating a "bulge" — and then, at that point, drops below 26.5, the stock is ready to change course. An index of 27 addresses a rather volatile stock, so a few traders set a lower baseline while determining the presence of a price bulge.
While you can utilize a ton of other technical indicators, for example, standard deviation, to measure volatility, the reversal bulge function of the mass index can offer you a unique viewpoint on the market condition. You can also utilize mass index to trade trend continuations.
The mass index indicator can be a great device for short-term trading, in the event that a trader takes an opportunity to change the sensitivity or periods according to the historical volatility of the particular stock they are studying.
Hypothetical Illustration of Mass Index
To find out about what mass index genuinely does, consider driving a car and the mass index calculator, which shows the volatility of the stock, is your speedometer. The speedometer of the car will just show how fast or how slow you are going, so you will probably need to utilize a compass to figure out in the event that you are driving towards the north or the south — the compass being another technical indicator for determining direction. As such, in the event that you don't understand what direction you're heading, it matters next to no the way in which fast you're going.
