The Center of Gravity (CoG) is a channel indicator of technical analysis. The CoG indicator is not included by default in most trading platforms. It is not in the Metatrader 4 (MT4) program by default although you can download the indicator from various sources online.
The indicator consists of five lines, which look very much like another channel indicator – MBFX. The Center of Gravity determines the boundaries of price fluctuations and measures the volatility of a traded asset.
What is the Center of Gravity indicator?
The Center of Gravity indicator is based on moving averages. Based on them, the “center” of prices is calculated, and price channels have constructed that act as original corridors for asset quotes.
In total, the Center of Gravity indicator draws five lines on the chart — the “center” itself and four indents from the center, the construction of which depends on fluctuations in price and volatility. Channels, depending on this, can be narrow or wide.
The greater the volatility – the wider the channels, the narrow the channels, lower will be the volatility.
By default, the indicator displays the following lines on the chart:
- blue is the center of the channel;
- two green – the inner borders of the channel;
- two yellow are the external borders of the channel.
The color scheme, of course, can be customized to your taste.
The external and internal boundaries of the channel are a kind of support and resistance lines for the price.
Now let’s take a look at the settings for this indicator.
Five types of variables are proposed:
- bars_back – the number of candles (bars), relative to which the indicator will build its readings (by default – 240);
- m is the linear regression value, which means how many turning points will be used when building the line – the higher the value is chosen, the more sensitive the lines will be to price behavior (by default – 5);
- I – parameter with which you can move the readings for a certain number of candles into the past (by default – 0);
- kstd – coefficient of deviation of the channels from the center – the more to set the deviation, the further the lines of the channels from the midline will be built (by default – 1);
- sName – the red dot.
Based on these indications, the trader has the opportunity to see how far the price deviated from its baseline. According to the theory of technical analysis, the price always strives to return to the point of its equilibrium value, i.e., to the blue line. If prices have gone too far to the channel’s extreme borders, then we could expect a possible reversal.
Let’s consider the methods of the practical application of the Center of Gravity (CoG) indicator in more detail.
How to use the Center of Gravity indicator?
Based on the description above, it becomes clear how to use the Center of Gravity indicator – look for entry points for a buy when the price reaches the lower bounds of the price channel, and trade for a fall if the price reaches the upper bounds.
Achieving a yellow (outer) line at the cost is a more reliable signal than breaking only the green (inner) border.
If the price touches the yellow line, or even better breaks through it, then this means that the price has deviated from its “center” too far and may be ready to return to the blue equilibrium line.
I tend to find that the higher the time interval, the more reliable the trading signal. It must be remembered that this forex indicator redraws its values when new data on the price of an asset appears – the channel can expand if the market volatility increases sharply, or narrow if the chart shows consolidation.
For me, one of the best ways to use the indicator is in daily charts that respond much more slowly to price changes and, on the whole, are smoother in my opinion, which helps to avoid repeated redrawing.
Another option for using the CoG indicator is trading at the price crossing its central line.
If the chart has crossed the blue line from bottom to top, then we can consider the option to buy, if from top to bottom, we may consider to sell.
It is better to take profit when the price reaches the green (internal) price limits and set the stop loss on the opposite internal border.
Center of Gravity trading strategy
We are going to explain a simple Center of Gravity trading strategy based on the centerline of the indicator. However, you can combine the indicator with other tools as well.
Center of Gravity buying strategy
- The price should break the centerline from bottom to top.
- Wait for the candle to close.
- Place the stop-loss near recent swing low if you are an aggressive trader. If you are a conservative trader, then place the stop-loss near green or yellow band on the downside.
- Place the take-profit order near the green or yellow line.
Center of Gravity selling strategy
- The price should break the centerline from bottom to top.
- Wait for the candle to close.
- Place the stop-loss near recent swing low if you are an aggressive trader. If you are a conservative trader, then place the stop-loss near green or yellow band on the downside.
- Place the take-profit order near the green or yellow line.
Center of Gravity Conclusion
Using the CoG tool, you can build a unique trading system, since the price never moves in only one direction – it is cyclical and varies from its average values to extremes and vice versa. And it is these values that help to identify the considered indicator.
The Center of Gravity indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
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