﻿ Mass Index (MI) Indicator | Revieweek™

Mass Index (MI) Indicator

The technical indicator Mass Index (MI) was developed and first used by Donald Dorsey, a famous trading theorist and practitioner, to determine the trend reversal situations. Trader Tushar Chande also took an active part in popularizing this indicator. Now the Mass Index is effectively used in the forex market (stock market trading).

Mass Index

The idea of the Mass Index (Fig.1) is based on the fact that the trend changes when the price range between the maximum and minimum prices changes, and the greater the distance between the prices, the greater the volatility. That is, if the range expands, the indicator increases, and if it shrinks, the MI decreases.

Image. 1

The Mass Index is based on an exponential moving average and two EMAand is calculated in four steps: first, the nine-period EMA for the range of maximum and minimum prices is calculated. Then the nine-period moving average of the nine-period moving average is calculated. The value of the first-order moving average is divided by the second-order moving average.

The index is calculated as a 25-period moving sum of the EMA coefficient. This formula is derived and tested empirically. It is the moving averages in this form, the indicators are smoothed twice, which allows on the one hand to avoid unnecessary signals, and on the other hand not to miss the signals, which would be missed by other indicators (Forex Indicators).

Mass Index (MI) Signals

The main feature of the Mass Index (MI) indicator is that it actually shows only one signal - a trend reversal. The signal to change the trend is the so-called "reversal hump" - "Reversal Bulge", which is formed in strictly specific conditions: when the mass index in 25 periods rises above the level of 27, and then falls below 26.5.

Trading signals are calculated using a nine-period exponential moving average (EMA). Thus, a signal to buy when the "reversal hump" and the exponential moving average are directed downward, and a signal to sell - when both the Reversal Bulge and the EMA are directed upward (forex signals).

Visually, the "reversal hump" is easy to determine, so the Mass Index indicator is quite popular among traders, although it cannot be called a standard one. The Mass Index indicator can show signals with divergences, or, more precisely, indicate the formation of false signals.

Divergence - when the indicator line and the price line on the uptrend diverge, in this case there is a high probability of reaching the maximum of the price, and the beginning of a downward trend in the near future. When the indicator line of the Mass Index and the price line on the downtrend diverge (Fig. 2), there is a high probability of the price beginning to rise in the near future.

Image. 2

But in spite of the fact that it is possible to consider the Mass Index divergence when building strategies, the "reversal hump" is the main signal of the indicator and it is necessary to add the Mass Index to the trading terminal only for this signal. You should also remember that no indicator signals show the market direction.

The Mass Index (MI) is a non-standard indicator, so it must be downloaded to the terminal separately. The boot file is downloaded into the appropriate folder on the computer and then the file is extracted through the trading terminal by: "File" - "Open" data directory - folder on your computer - two clicks on the boot file. Now it is in the list of custom indicators (fig. 3).

Image 3

In the Mass Index settings you can change the EMA period (EMAPeriod), the period of the double moving average (SecondPeriod) and the number of periods used (SumPeriod). But it is not recommended to change these parameters: standard values of levels are 26.5 and 27, standard values of EMAPeriod and SecondPeriod are 9.

If you rebuild the parameters, for example, to increase EMAPeriod, then the indicator will become even smoother. If you increase the SecondPeriod, it will give more signals. But smoother signals will not allow to see quality signals, and among more signals there will be more false ones. Therefore, the standard settings (Fig. 4) are optimal for trading, they have been tested in practice.

Image 4

Strategies with the Mass Index

One of the most well-known strategies for applying the Mass Index is together with an additional exponential moving average. To implement the strategy, you need to wait for the formation of a "reversal hump" pattern and analyze the position of the exponential moving average. We should use it to determine whether the trend is descending or ascending and open positions accordingly. This strategy requires a stop loss. Thus, the order of operations will be as follows:

• The Mass Index indicator breaks the 27 level from the bottom to the top and then "bounced" below the 26.5 level.
• According to the EMA, if the price is above it, a buy trade should be opened, if the price is below the EMA - a sell trade is opened. If prices are below the Moving Average - sell, if higher - buy.
• The deal closes when MI is close to 26.5.

Another, multi-indicator strategy involves using DMI, TSI and triple exponential moving average indicators with the Mass Index. Mass Index in the implemented strategy shows the trend reversal point. Recall, DMI indicator (Directional Movement Index), is a tool to assess the direction and strength of the trend. TSI (True Strength Index) is an oscillator for assessing the strength of the price impulse.

Triple Exponential Moving Average (TRIX) for assessing the direction of trend movements. It is a complex of moving averages, which help to reduce the lag time of signals. A period is chosen for constructing the EMA, the first MA is calculated, then the second EMA is calculated and the third EMA. The indicator shows the price changes very well. Therefore, after the probability of trend change is determined by the behavior of the Mass index, the direction of the trend is determined by placing the slips in the TRIX indicator. And the signals are confirmed by DMI signals.

There is a strategy in which the Mass Index is used only with the TRIX indicator (Figure 5), because they complement each other very effectively. In such a strategy, after a "reversal hump" on the Massa Index occurs, the signal to buy is the TRIX signal line crossing the main line from below. Accordingly, if the crossing is from the top to the bottom, it is considered as a sell signal. The strategy works only when the trend is pronounced, while it generates too many false signals during a flat period.

Image 5

The mass index is also used in strategies with a simple moving average. For example with two MAs with different periods - SMA (21) and SMA (50). When the SMA with 21-period ("fast") is above the SMA with 50-period ("slow"), it will be a signal of an uptrend. Correspondingly, if the 50-period ("slow") SMA is above the 21-period ("fast") SMA, it will determine a downtrend.

Having received a signal from the Massa Index that the trend is changing - that is, when the index rises above 27 and then falls below 26.5 - you must wait for any crossover of the simple moving lines. And, according to the behavior of the lines, open positions.

Indicators such as Relative Strength Index (RSI) or MACD (Fig. 6). MACD deviations, as well as overbought or oversold indicators RSI confirm the possibility of a change in the trend.

There are few strategies specialized for use of the Mass Index (MI), but this is only because this Mass Index is very versatile and is designed to improve any strategy and can be effectively applied when working with any indicator.

Image 6

Dorsey indicators and their effectiveness

The Mass Index indicator is considered a reliable and accurate indicator that generates an effective reversal signal. Signals are formed rarely, but they have a high degree of accuracy. The disadvantages, more precisely, the specifics of the indicator include the fact that it does not show the direction of the trend and therefore its use without additional indicators is questionable in terms of efficiency, at least in forex-trading.

The Mass Index indicator shows, in fact, only one signal, but the effective working out of this signal depends on the trader, his experience and skills of working in the market. In order to use Mass Index it is important to be able to correctly determine support and resistance levels, use additional indicators to determine trend direction, see standard graphic patterns of price reversals. In any case, before using the Mass Index on a real account, one should test it on a demo account.

Donald Dorsey also developed the Relative Volatility Index (RVI), on the same principle as the Mass Index and for the same purpose - "catching" signals missed by other indicators. In particular, the RVI should confirm the signals of a very popular Relative Strength Index (RSI) indicator.

Unlike the RSI, which is based on the measurement of price changes, the RVI indicator shows price extremes of the standard deviation in a certain range, but it does not show the price movement, but the strength of the market. The RVI is calculated according to a formula similar to the Mass Index, based on the 10-day standard deviation of closing prices with two EMAs with periods of 14. It also gives clear signals: if the Relative Volatility Index is above 50, then buy positions are opened, if below 50, then sell positions are opened. If the signals at 50 are missed, the next buy signal is at 60, and the sell signal at 40.

Just like the Massa Index the Relative Volatility Index is not applied as a separate indicator, they confirm the signals of moving averages, RSI, MACD, stochastic oscillator and other indicators and oscillators, including the signals which do not look reliable. According to the idea of the indicator's developer, his indicator was supposed to improve existing trading systems, just like the Mass Index. And its effectiveness also depends on traders' skills in applying other indicators and understanding the market.

Sitemap