The Mass Index is a nifty tool designed to help traders spot potential trend reversal points. Developed by Donald Dorcy, this indicator measures price movement to gauge the strength of a trend. When there's significant price action, the Mass Index will rise; conversely, it will dip when the movements are less pronounced.
According to Dorcy, one of the key signals to watch for is a unique pattern called the "reversal bulge." This occurs when the 25-period Mass Index first climbs above 27, then subsequently falls below 26.5. When this happens, it could indicate an imminent price turn, regardless of the current trend direction—whether prices are on the rise, falling, or simply oscillating within a range.
To determine whether the reversal bulge suggests a buy or sell signal, many traders look at the 9-period exponential moving average (EMA) of prices. If you see a reversal bulge forming, it's a good idea to buy when the moving average is falling (indicating a potential turn) and to sell if it’s rising.
Mass Index indicator
How to Calculate the Mass Index:
Where:
- SUM - the total sum of values;
- HIGH - the highest price of the current bar;
- LOW - the lowest price of the current bar;
- EMA - the exponential moving average;
- N - the period of the indicator (the number of data points considered).
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