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The Mass Index is an indicator developed by Donald Dorsey; it is used to catch trend reversal points (predict reversals) by comparing the changes in the trading range, which is the high price minus the low price. The Mass Index goes up if there is a considerable movement in the security price; otherwise, the Mass Index goes down.
The Mass Index calculation consists of dividing the exponential moving average of the trading range for a particular bar by the exponential moving average of the exponential moving average of the trading range. The results are then added for a specific number of periods, usually 25.
According to Donald Dorsey, the most important pattern or signal generated by the Mass Index indicator is when its value exceeds 27 and then reduces lower than 26.5, using a 25-period chart. This signal is called 'reverse bulge' and it indicates that a turn in prices is likely.
Because the indicator does not give any indication on the direction of the trend, traders use an exponential moving average (usually a nine period is used) of closing prices to determine whether the 'reverse bulge' signal is bullish or bearish. If the EMA (exponential moving average) is trending up then the trader should take a long position, and if the EMA is trending down then the trader should take a short position.
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