The Mass Index,
by Donald Dorsey, is supposed to spot reversals in the trend by
monitoring price volatility (the distance between the high and low).
More volatility inplies a bigger Mass Index and vice versa. According
to the inventor, the most important pattern is a "reversal bulge.",
i.e. when a 25period Mass Index rises above 27.0 and then falls
below 26.5, indicating a reversal in price. The major trend (bullish
or bearish) doesn't matter. As a 'swing trading' indicator, this
indicator is unlikely to be of much use when day trading.
To calculate the Mass
Index, calculate a 9 day EMA of the difference between the day's
high and low prices; next calculate a 9 day EMA of the moving average
you just calculated; next divide the first moving average by the
second moving average; finally sum those values for the number of
periods in the Mass Index (for example, 25 days).
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