Mass Index SG
The Mass Index is a technical indicator that predicts a reversal in trend and suggests counter-trend trade entry points.
It consists of an oscillator line. The oscillator is based around an average of 25, and can range between around 20 to 30.
Trades are suggested when the oscillator has moved up above the 27 level (when the line turns red), and then falls back below the 26.5 level. This is known as a 'reversal bulge'. Counter-trend trade entry is suggested once the bulge pattern has been completed.
The indicator cannot tell you the direction of the trend change, only that a trend change is likely to occur. Thus this indicator is often used in conjunction with a 9 day simple or exponential moving average (available in the standard suite of indicators provided with MT5). Once the Mass Index indicator suggests a trade, the direction of the trade would be in the opposite direction of the current movement of the 9-day moving average (thus if the 9-day MA is falling, you would buy the market, and vice versa). You may prefer to use different indicators rather than the 9-day MA to tell you the current market trend, and you may want to consider the direction of the trend when the market first exceeded 27.
The key to trading the Mass Index is as follows:
- Wait for the index to bulge above 27, AND THEN fall back below 26.5
- if the 9 day moving average is currently falling, then buy the market; if the average is rising, then sell the market
- always use a stop-loss
You may prefer to wait for a confirmation of trend change before trading - for example once the reversal bulge signal is given, you could buy when the price now is greater than the high of the day before (or sell when the price now is lower than the low of the day before)
The index is actually a measure of volatility - readings above 25 suggest a higher than averagely volatile current market and readings below 25 suggest a quiet market. Reversal points in a trend are often preceded by a period of higher than average volatility, and once that volatility has quietened, and the reversal bulge is complete, a trend reversal can occur.
The index is calculated as a triply-smoothed measure of the daily highs vs lows. It is the 9-day exponentially weighted moving average ('EMA') of the daily high-low, divided by the 9-day EMA of those EMA's and then summed over the last 25 days. Thus, the sum over last 25 days of 9-day-EMA [H - L] / 9-day-EMA ( 9-day-EMA [H - L] ). The parameters '9' and '25' used here are user-specifiable in the indicator properties, but the defaults are probably sufficient.
Trade signals can be infrequent, especially for a low-volatility underlying. For more signals, you can use lower trigger levels than 27 and 26.5, but the risk of false signals then increases.
- Index summation period - The number of days over which the doubly-smoothed exponential moving average is summed, see the calculation methodology above. Default is 25 and is probably fine. Note that if you use something different to 25, then the trigger levels will also scale up or down proportionately (this will be shown on the graph)
- EMA period - the number of days used for calculating the exponentially weighted moving average (EMA) and the EMA of the EMAs, see calculation methodology above. Default is 9 and is probably fine.