What Is Center of Gravity and How to Trade It?

Also known under the COG abbreviation, center of gravity is a technical indicator utilized by experienced traders to predict and spot potential turning points. The indicator was established in 2002 by John Ehlers with the aim of not just spotting the turning points but also identifying them as soon as possible.

The center of gravity meaning refers to the idea of smooth and clear turning point identification handled without distraction. In this article, we are going to answer some of the baseline questions. What is center of gravity? How to calculate it and how to trade using the indicator?

Center of Gravity Meaning Explained

Center of gravity is one of the most commonly used and popular technical indicators applied by beginners and professionals. The main purpose of this instrument is to help traders anticipate potential price and trend moves as well as make a profit on price reversals as soon as they take place with no delays. The ability to react promptly to market changes and price actions is one of the most important benefits delivered by the indicator.

On the other hand, we should keep in mind the fact that the center of gravity is an oscillator. In other words. COG works best when it comes to range-bound markets. If the price keeps trending, the indicator will make no sense or can be even potentially dangerous to use.

For example: if compared with RSI, COG does not show oversold or overbought market conditions.

How to Calculate Center of Gravity

When plotted on the chart, the COG indicator forms two lines that rely on the sum of the prices with a given timeframe. Buy and sell signals are generated by the indicator’s moving average. To calculate COG, traders utilize the following formula:

To configure the indicators’ setting, you are supposed to adjust a standard 3-period simple moving average along with 10 periods’ closing price. At the same time, some COG versions may require slightly different configurations although basic principles are always the same.

Reading and Interpreting Center Gravity Indicator

As we have already discussed, the tool uses a simple modality of closing prices over the last periods to generate clear and transparent trading signals:

1. Buy signal is sent once the indicator’s line has crossed the signal line from above.
2. Sell signal is generated once the COG line has crossed the signal line from the bottom.

The key advantage here is that COG does not have a leg between the indicator and the price. In other words, traders will be able to spot turning points as soon as they occur.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.