The Center of Gravity indicator is also known as COG indicator and it helps both professional and novice traders predict the price turning points. The indicator was invented in 2002 with the aim of identifying the support and resistance levels as soon as possible. Providing enough time for traders to plan the trade well.
The COG indicator is a very popular technical tool for trading range-bound markets and is widely consumed by position traders, intraday traders and scalpers. The indicator is especially useful for Trading Forex pairs. Most technical indicators display what is happening on the markets. The Center of Gravity indicator on the other hand, helps predict the future. The indicator only works in certain market conditions and it’s best to be used in context. We’ll discuss the shortcomings in more detail in this article later.
The indicator is based on the theory that prices have cyclical nature. And the cycles are shown as the highs and lows on the chart. Based on that theory, the prices will regress towards the mean, which can be seen as the blue line in the middle of the indicator.
Indicators are generally categorized as leading and lagging. Lagging indicators are best for trading trending markets. They help traders analyze what is already happening in the market and confirm a trend. As for the leading indicators, they help predict the future direction. The Center of Gravity indicator is considered as a leading indicator. Leading indicators such as oscillators are best for trading range-bound markets.
The COG based trading strategies assume that prices are moving cyclically around the mean price. And keep in mind that some asset types have more built in cyclical nature than others. For example Forex trading is characterized by more cyclical price action than Crypto or Stock market.
Currency pairs consist of base and quote currencies. Price of each pair is determined by the strength of base currency in relation to quote currency. Each currency is backed by countries, governments and central banks. And therefore, you can hardly see one currency pair drop close to zero or rise sky high.
On the other hand, Stocks and crypto currencies are only backed by their investors. Prices of their stocks can increase without limit or drop to zero. For this reason, the COG indicator is not as actively used for trading these markets.
COG indicators are widely used by intraday scalpers. Scalpers are looking for turning points in lower time frames and place trade more frequently than position traders. Scalpers generally care less about market direction and try to benefit from price swings. They enter the trade by selling assets whenever price breaches the last upper band. And they enter the trade using the buy button whenever the price gets lower than the last lower band. The exit points and stop loss targets are less defined and are based on price action. For longer time frames, traders use Belkhayete’s strategy.
A professional trader and founder of asset management company El Mostafa Belkhayate has created a trading system known as Belkhayete’s Center of Gravity trading strategy. The strategy has become super popular in France. The strategy has won the Paris trading fair Golden trophy in 2009. The following year, the strategy won the silver trophy.
For entries, the strategy uses a 4 hour chart time frame. The position is opened in the direction of a trend. For determining the trend direction, you can simply use the blue gravity line. It’s no wonder that placing orders in the trend direction can increase the chances of success. The trade is opened once the first candle closes within the upper or lower bands’ range. Traders are waiting for pullbacks and COG signals to join the trend.
As for the Take Profit targets, traders are using the blue line. In case you want to stay in the position longer, you can modify this strategy a little bit and use a trailing stop or close positions gradually.
As every technical indicator, COG comes with certain shortcomings. Let’s discuss them in detail in order to avoid making mistakes when using the indicator.
The indicator is not intended for trending markets and works best for range bound markets. Markets are not static. They change from trending to ranging to trending again. And the real challenge is determining the right conditions for using COG.
COG is purely a technical tool. It doesn’t take into consideration many important factors such as fundamentals. Therefore, it’s best to use the indicator in conjunction with other instruments.
The COG indicator as most technical indicators is less effective for smaller time frames. The indicator produces more false signals as you start using lower and lower chart time frames. Scalpers balance this by placing trades more frequently and risking smaller amounts per trade.
The indicator provides about 4 signals per month when using 4h or larger chart time frames. On the upside, traders can trade various ranging markets and increase the number of trades that way.
COG indicator is notorious for being dynamic. Meaning, the lines change as the prices change. It’s possible that the lower band line located in a certain spot today will be moved to another place tomorrow. As a result, backtesting your COG strategies becomes almost impossible.
Trading reversals can be very difficult for novice traders as it’s safer to follow the trends instead of going against them. Guessing the tops and bottoms is very difficult. In trading it’s more important to be correct and grow your balance gradually than it is to be a genius.
Trading reversals are characterized by a lot of false signals. Which makes determining the price direction difficult. What’s more, planning the Stop Loss targets gets challenging as there’s no clear level on the chart. Usually, traders place larger Take Profit targets than Stop Loss limit orders to get an edge. Having an edge is essential when it comes to trading profitably. However, it’s not the only thing you need to be consistent with your results. Market conditions are often changing. Range bound assets can start trending and the COG indicator can start producing false signals again. It’s important to develop strategies that work in different market conditions and consistently work on improving them.
To sum everything up, the COG indicator is a technical tool that provides entry signals for range-bound markets. The higher the time frame used, the more precise signals are. On the downside, higher time frames produce less signals. COG is a leading type of indicator, which means that instead of measuring current price action, it provides insight to future price move. The indicator based strategies have various limitations, such as: limiting backtesting capabilities. COG provides less precise entry points when using the indicator for smaller time frames. The indicator is best to be used in a context.
The COG indicator is used for determining the future price direction in ranging markets. The indicator uses average prices and is based on the assumption that markets have a cyclical nature. Prices deviate from average price and tend to return to the mean level.
Yes. In fact COG indicator is ideal for trading Forex pairs due to the fact that Forex is a range-bound market. COG is intended for trading assets that are ranging.
No. COG is intended for trading ranges as the main idea is that the price will come back to the mean price from the deviation. Analyzing strong trends using COG can produce a lot of false signals.
The COG should be only used in ranging market conditions. The indicator is dynamic, which makes backtesting difficult. The signals become more unpredictable as you go on smaller time frames. COG helps identify reversals and support and resistance levels. Trading tops and buttons can be risky for novice traders.