What Is The Mass Index Indicator & How To Trade With It

Mass Index Explained

The Mass Index (MI) indicator is a technical indicator, which makes it possible to predict a trend reversal by analyzing the dynamics of changes in the price range. It was first compiled and applied by renowned theorist Donald Dorsey.

What is the Mass Index indicator?

The Mass Index was primarily created to determine the level of volatility (i.e., activity) in the market. In his calculations, he uses the expansion or reduction of the range between local price highs and lows, which allows us to determine the upcoming trend reversal.

On the scale, the indicator line rises when there is an increase in the difference between the highs and lows of the price, and falls when the price channel narrows (that is, the volatility in the market falls, and the price lies in a narrow horizontal flat). moving averages are used to build the index model.

Its biggest advantage, for which the Mass Index traders are very fond and appreciated by professional traders, is the opportunity to give a clear picture in the market about a trend reversal.

Mass Index on chart
Mass Index on chart

Calculation of Mass Index indicator

This indicator is calculated based on the Exponential Moving Average in four stages.

  1. The first stage calculates the Exponential Moving Average for 9 periods from calculating the range between the maximum and minimum prices.
  2. Next, the double EMA is calculated as the 9-period EMA of the 9-period EMA.
  3. The first calculated EMA is divided by the second obtained in the course of calculations from the second EMA.
  4. Well, at the final stage, the Mass Index is calculated as the sum of the moving average EMA for the period 25.

Customization of Mass Index

To calculate the Mass Index indicator, you must first make the following settings:

  • EMA Period. It sets the working period of the exponential moving average.
  • Second Period. This section indicates the auxiliary MA period.
  • Sum Period. This is the number of extreme periods used.
  • Levels. The program initially set indicators 26.5 and 27 recommended by the original methodology.
Mass Index custom settings
Mass Index custom settings

Experts would probably state not to change the default settings. An individual adjustment to the timeframe or some kind of instrument is permissible only if there is sufficient experience working with the indicator.

How to use the Mass Index indicator in trading?

The Mass Index indicator does not show the direction of trend movement. If it rises or falls, this does not mean at all that prices will rise or fall with it. The indicator simply with a high degree of probability reports that the market is about to turn around.

The mass index is not an independent indicator and the rise or fall of the line relative to the scale will not at all mean that the trend is also rising or falling, respectively. This market analysis tool determines only the level of volatility and the moment of price reversal but not the direction of the trend. Therefore, do not confuse it with other similar trend counterparts.

Traders use it when necessary to determine the moment the trend ends, when it is better to open a new trade in the opposite direction and close the current one.

Main trading signals by Mass Index:

  • reversal hump
  • divergence
  • convergence

We’ll start with the first and most basic trading signal, which is used primarily to determine the changes in the trend – a reversal hump.

Reversal hump in Mass Index indicator

The MI indicator line on the scale intersects with the level of 27, and after it goes below and intersects with the level at 26.5.

Mass Index reversal hump
Mass Index reversal hump

The reversal hump trading signal is visually determined on the chart quite easily so beginner traders should not have problems spotting it.

Mass Index divergence and convergence

Divergence is a mismatch between the price on the chart and the indicator reading on an upward bullish trend. But convergence is the same mismatch (opposite signals), but only with a downward trend.

Consider the divergence trading signals first. This is a classic discrepancy, which is a strong signal for all oscillator indicators. Experienced pros look for these signals, since they can have much greater efficiency than classic ones.

Divergence, in contrast to convergence, appears on an uptrend. It means that the trend will soon reverse in the opposite direction, where the indicator is signaling.

Divergence in Mass Index indicator
Divergence in Mass Index indicator

Mass Index trading strategy

The Mass Index trading strategy may consist of multiple indicators but here we present a strategy based solely on the Mass Index.

Mass Index buy strategy

  • The MI value should touch 27 mark and then falls back below 26.5 mark.
  • The background should have a downtrend comprised of at least 20 bars.
  • Wait for the candle to close bullish to enter the trade.
  • Place stop-loss slightly below the swing low.
  • Take profit can be twice the size of stop-loss.
Mass Index buy setup
Mass Index buy setup

Mass Index sell strategy

  • The MI value should touch 27 mark and then falls back below 26.5 mark.
  • The background should have an uptrend comprised of at least 20 bars.
  • Wait for the candle to close bearish to enter the trade.
  • Place stop-loss slightly below the swing high.
  • Take profit can be twice the size of stop-loss.
Mass Index sell setup
Mass Index sell setup

Mass Index trading tips

The main thing is to use this indicator only in tandem with some other, since the Mass Index is not an independent tool for generating trading signals.

An index essentially generates only one type of trading signal. But many pros supplement it with levels of support and resistance. The trend direction perfectly helps determine auxiliary graphics patterns, candlesticks, figures of graphic analysis and more.

The creator of the Mass Index also released the Relative Volatility Index. According to his algorithm, he is somewhat like his older brother. But more of it was created to confirm the signals from the Relative Strength Index.

Mass Index Indicator conclusion

The Mass Index indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.

I would prefer to use the majority of technical indicators such as the Mass Index indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

The Mass Index indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Mass Index indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Mass Index indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!