Mass Index Indicator is developed by Donald Dorsey. It uses the difference between the high and low in a given interval to spot potential price reversals. The Mass Index is a volatility indicator that does not have a directional bias. Instead, this indicator identifies range bulges that can foreshadow a reversal of the current trend.
What is Mass Index Indicator?
The Mass Index represents the difference between high and low prices in security over time. It reflects a study on volatility. Once the Mass Index moves above a specific level, then drops back below, it usually means that a trend change could be forthcoming. Donald Dorsey developed it, in the early 1990s. He suggests that a reversal of the current trend will likely take place when the range widens beyond a particular point and then contracts.
The indicator can offer you a unique perspective regarding the market condition. Here, the MI indicator can spot trend reversals, but you can also use it to trade trend continuations.
Key Points on Mass Index Indicator
- The mass index identifies potential reversals based on market patterns. These patterns aren’t often considered by technical analysts. They largely focused on singular price as well as volume movements.
- Technical analysts must combine the indicator’s readings with directional indicators such as the AD Line that specializes in forecasting those types of things.
What is the Formula of the MII Indicator?
The formula of the MII (Mass Index Indicator) is quite complex. To calculate the indicator, first, you need to make the nine-day exponential moving average (EMA) calculation. It may be done between the high and low price range for a period of time (usually 25 days). After that, divide the figure by nine-day EMA of the MA in the numerator.
How to Set up Mass Index Indicator on Charts?
Here, I will guide you step by step, how to set up Mass Index Indicator on Charts. First, I place the setup details with Zerodha kite, then with the Upstox Pro.
Set up details with Zerodha Kite
Let us check how to attach this indicator in Zerodha Kite platform and also what are the usage of this technical indicator.
You will get this indicator in the STUDIES section of the Kite web platform. Check the default parameters of the indicator as shown in the image above where we attached the indicator on the HDFC share price intraday chart. The default parameters are Period: 25 and Bulge Threshold: 27.
Set up details with Upstox Pro
First, sign in to Upstox pro, then open chart any of a script. After that, customize and click on the Apply option.
Leading Properties of the Indicator
- Mass Index rises above the trigger line which is set at 26.5 and the setup line which is set at 27.
- The Mass Index indicator uses the high-low differential to provide a smoothed volatility measure.
- A reading of 27 on the Mass Index Indicator would denote fairly volatile security.
- However, while the MI indicates a potential trend change, it says nothing about what its direction might be.
- MI is unique in nature. It seeks to identify potential reversal points in the market outside of the standard analytical techniques of transforming price and volume.
- Though a trading range can be associated with price and volume, the MI relies on trading ranges that aren’t exclusively focused on the direct value of one or the other.
Mass Index Indicator Trading Tips, Strategy
Here, is the most important part of the indicator, the strategy, and trading tips.
- When the Mass Index falls below the trigger line, then a reversal of the prior trend is expected then falls below the setup line.
- This indicator typically fluctuates in the mid-20s. The high end of the historical range suggests increasing volatility, which increases the chances for a trend reversal.
- In this indicator, chartists should consider a lower threshold to produce more signals. The Mass Index does not have a directional bias.
- The directional bias depends on the existing trend. As with all indicators, chartists should use other analysis techniques to complement the Mass Index.
- Less volatile security may require a lower threshold like this.
In order to get a better idea of what mass index truly does, just think of driving a car and the mass index calculator. It shows the volatility of the stock, and, that is your speedometer. The speedometer of the car will only show how fast or how slow you are going somewhere. So you will need to use a compass to figure out whether you are driving towards the north or the south. The compass is another technical indicator for determining direction. In simple words, if you don’t know what direction you’re going, it matters very little how fast you’re going.
The MI indicator can prove to be a great technical tool for short-term trading when traders take the time to change the sensitivity or periods according to the historical volatility of the particular stock that they are studying. That is why one should use a back-testing program.
Once you learn how to apply the Mass Index indicator by combining other technical trading strategies, you can simply identify potential trend reversals. It can improve the timing of your short to determine whether or not to enter against the old trend and in the direction of the allegedly new one is not wise. The Mass Index looks to identify potential price reversals in the stock market by analyzing its trading ranges.