Identifying Turning Points
The Center Of Gravity Oscillator
by John F. Ehlers
Here's an indicator that identifies every major turning point without much lag.
This new oscillator is unique in that it is smoothed and has essentially zero lag. The smoothing enables clear identification of turning points, and the zero lag aspect means action can be taken early in the move. This oscillator is the serendipitous result of my research into adaptive filters. While the filters have not yet produced the results I am seeking, this oscillator has substantial advantages over conventional oscillators used in technical analysis.
The center of gravity (CG) of a physical object is its balance point. For example, if you balance a 12-inch ruler on your finger, the CG will be at its six-inch point. If you change the weight distribution of the ruler by putting a paper clip on one end, then the balance point shifts toward the paper clip. Moving from the physical world to the trading world, the prices over a window of observation can be substituted for the units of weight along the ruler. With this analogy, you can see that the CG of the window moves to the right when prices increase sharply. Correspondingly, the CG of the window moves to the left when prices decrease.
COMPUTING THE CG
The idea of computing the center of gravity arose from observing how the lag of various finite impulse response (FIR) filters varies according to the relative amplitude of the filter coefficients. A simple moving average (SMA) is an FIR filter where all the coefficients have the same value (usually unity). As a result, the CG of the SMA is in the exact center of the filter. A weighted moving average (WMA) is an FIR filter where the most recent price is weighted by the length of the filter, the next most recent price is weighted by the length of the filter less one, and so forth.
...Continued in the May 2002 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the May 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.
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