If somebody asks what is the best crypto trading indicator for reversal trading, it should be noted that there is a trading indicator exclusively dedicated to this purpose: the Mass Index indicator. As this indicator was invented by Donald Dorsey, a renowned American trader specialized in reversal trading strategies, there is no reason to doubt its caliber in supporting cryptocurrency traders who wish to explore reversal trading. It is time to learn about this trading indicator. Are you ready?
1. Mass Index: What’s It
The Mass Index is an advanced crypto trading indicator designed for experienced traders who understand how to identify and capitalise on market reversals, which are when the direction of a price trend changes. It looks at how far apart the highest and lowest prices are in a specific period. The primary purpose of the indicator is to detect these reversal points in the market.
1.1. The History of Mass Index
The Mass Index was created by Donald Dorsey in the 1980s. He introduced this indicator in 1992 but had been discussing the concept since the 1980s. The idea behind the concept is that in a trending market where a reversal might be coming, the price tends to spread out or ‘widen’.
2. Calculating Mass Index
Calculating Mass Index is simple, yet complex.
| EMA1 = Exponential Moving Average of the high-low price differences over a specified period EMA2 = Exponential Moving Average of EMA1 |
Let’s break down the entire calculation to three parts:
- Calculate the average difference between daily highs and lows over a specific time using Exponential Moving Average (EMA).
- Smooth this EMA result from step 1 by calculating another EMA.
- Divide the first smoothed EMA by the second smoothed EMA to obtain the Mass Index.
3. Steps to Launch Mass Index on a TradingView Chart
Launching the Mass Index indicator on a TradingView chart is an eight-step process.
- Log into your TradingView account
- Open the trading pair or asset you want to analyse
- Click on the ‘indicators’ button at the top of the chart
- In the search box, type ‘Mass Index’, and select it from the list of available indicators
- Customise the Mass Index parameters as needed, using the settings icon in the indicator
- Click ‘OK’ to apply the changes
- The Mass Index indicator will now be displayed on your chart, in the way you wish
- Analyse the chart using the Mass Index to identify potential reversals and changes in market volatility
4. Analysing Mass Index for Crypto Trading Signals: The Basics
To analyse the Mass Index for trading signals is simple. Here are the basic signals the Mass Index indicator generally gives:
Look for the Mass Index to cross certain levels, like 27.0 or 26.5. When it crosses up, it might signal a possible price reversal.
If you see a ‘Bulge’ in the Mass Index, which is a rapid increase, it could indicate a potential reversal.
When the Mass Index rises quickly, it suggests increasing market volatility, which might precede a trend change.
Endnote
The Mass Index indicator is a powerful tool for experienced crypto traders seeking to identify potential market reversals. Created by Donald Dorsey in the 1980s, it examines the spread between high and low prices in trending markets. Calculating the Mass Index may seem complex as it involves two EMA. Utilising this indicator on TradingView can help traders spot threshold crossings, bulge formations and volatility spikes, offering insights into possible price reversals and increased market volatility.