1992issue C061-2
Constructing a mass-index from nested exponential averages
A mass-index is a 25-period moving sum of the ratio of two exponential averages of the daily-range. After a specified reversal-threshold, nested close averages assign direction and a stop-loss is attached when the new position is opened.
- A mass-index is a 25-period moving sum of the ratio of two exponential averages of the daily-range.
- The first range average uses weight 0.2 on the current daily-range and 0.8 on its prior value; the second average applies those same weights to the first average.
- The reversal-threshold is the 25-period sum reaching 27 and then declining below 26.5; the intended position is then oriented opposite the fast-close-average and the slow-close-average.
- A stop-loss is specified as part of opening the new position rather than as a later add-on.
A sum of range averages
A mass-index is constructed as a 25-period moving sum of a ratio of two exponential averages of the daily-range. The daily-range is the session high minus the session low, and it is the width input to that sum.
Nested exponential averages of the daily-range
The first range average uses weight 0.2 on the current high-minus-low range and 0.8 on its prior value. The second average applies those same weights to the first average. That second series is a nested-exponential-average because its input is the first exponential series rather than the raw daily-range.
When daily ranges expand
When daily ranges expand, the first range average is designed to rise faster than the second. The ratio then exceeds 1, and the 25-period sum therefore exceeds 25.
The reversal-threshold
A price-reversal condition is specified when that 25-period sum reaches 27 and then declines below 26.5. That sequence is the reversal-threshold in this construction.
Nested averages of the daily close
Two nested exponential averages of the daily close use the same 0.2 and 0.8 weights. The slow-close-average smooths the fast-close-average rather than raw closes. The first close average is seeded by treating the prior close as the missing lagged average before ordinary updates begin.
Direction and a stop-loss at the open
After the mass-index reversal condition appears, the intended position is oriented opposite the direction of the two close averages. A stop-loss is specified as part of opening the new position rather than as a later add-on.