John Ehlers designed a technical indicator in 2002. It is known as the Center of Gravity indicator and belongs to the group of oscillators. Ehlers states there are no delays and the smoothing effect allows to catch signals very early and clearly.
What is the Center of Gravity indicator?
The indicator from 2002 was designed for trading on the reversals of the price. It helps to predict future movements and works best on ranging markets. Its efficiency drops significantly during the moments of the price trend. In opposition to such oscillators like Stochastic or RSI, the COG does not include oversold or overbought zones.
Two lines create the COG indicator. A simple moving average is drawn along to serve as a line that produces signals to buy or sell.
How to attach the indicator to the chart on IQ Option
You will have to prepare your chart that is, choose the asset and the candlesticks type. Then, go to “Chart analysis” and choose “Momentum” under the “Indicators” tab. The Center of Gravity indicator will be visible in the list of indicators on the right side. Click on it and it will be attached to the chart.
How to calculate the Center of Gravity indicator
Ehlers' indicator is derived from the sum of prices collected during a given period. The Center of Gravity indicator formula looks as follows:
COG = sum of closing prices Pn x (n + 1) / sum of closing prices Pn
Fortunately for us, we have the IQ Option platform, which has this indicator built-in. There is no need to perform complicated calculations. The important thing is to understand how the indicator works and to interpret it correctly.
You can always adjust the values according to your needs, but the default settings are 10 and 3, where 10 is the period in which closing prices are collected and 3 is the period of COG simple moving average.
What is Centre of Gravity in trading?
The principal rules are quite simple. As you can see, the calculations are not complicated. Basically, it is just a question of adding the closing prices during n recent periods. Then, there is a simple moving average with a period of 3. It gives clear signals to enter buy or sell positions whenever the lines cross each other.
The COG gives a signal to buy when the indicator's line crosses the SMA (signal line) from below and continues above it.
When the COG line intersects the SMA (signal line) from above and moves below it, you should go short.
Combination of the COG and the ADX
The COG can be successfully used when the market is ranging. You may want to use an extra indicator to identify a ranging market. I am talking about the ADX which stands for the Average Directional Movement Index.
The crucial line for our purpose is the line of value 25. When the ADX oscillates above 25, the market is trending. When it moves below 25, it indicates the ranging market. Now, you should wait for the two lines of the COG to intersect before entering a position.
The advantage the COG indicator has is that it produces the signals almost without any delay. There is no lag between the COG and the price. Thanks to that you can act fast and enter a trade in just the right moment.
Mind that this indicator works best when used in ranging markets. To avoid opening a transaction during the trend, simply add the ADX indicator to your chart. Using both will safeguard your choices.
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