Trading with the Center of Gravity Indicator

The Center of Gravity indicator, also known as the COG indicator, is a graphical tool that helps identify support and resistance levels. The classic form of the indicator is an oscillator formed by means of a weighted moving average. It is reasonably new compared to many better-known indicators, but is increasing popular as a method of trying to gain insights into future price swings.

As an oscillator, it offers two main benefits: low lag in response to price — its creator claimed zero lag — and clear turning points. As we will see, though, there are several different implementations of the root concept. Despite their differences, these all effectively aim to do the same thing: to identify where the outer limits of a trading range lie.

A word on leading and lagging indicators

Indicators can be split into two broad categories: those that are leading and those that are lagging. Leading indicators are predictive, attempting to give signals ahead of a move. Lagging indicators occur after a move and are often used as a confirming tool.

Lagging indicators are useful for trending markets. For example, confirming that a trend has begun and allowing you to jump on the back of it. In contrast, leading indicators attempt to signal a move before it occurs.

Often leading indicators take the form of oscillators, which means their value swings up and down within a bounded range. An example of a well-known oscillator is the Relative Strength Index (RSI), which varies between 0 and 100. It attempts within this range of values to indicate whether a market is overbought or oversold.

As we said in the introduction, the Center of Gravity indicator was originally conceived as an oscillator.

Origins of the Center of Gravity oscillator

A Center of Gravity trading system was first proposed by technical analyst John Ehlers. He saw weighted moving averages of price as analogous to the way the weighted coordinates of a physical object's mass distribution defines its center of gravity.

He described center of gravity for a given timeframe as the sum of the product of position multiplied by price, divided by the sum of prices. The position being the count of bars back from the current bar.

In other words, this was the COG formula equation he came up with:

COG = i=0N(xi+1) Priceii=0NPricei

Classic implementations of center of gravity use this calculation to produce an oscillator and there are more than one version available for MT4.

COG indicator MT4 download

Here's a conventional oscillator version of the COG indicator that I downloaded for MT4:

The Center of Gravity lines appear below the chart, shown as two very similar red and blue lines. The signal to trade is when the lines of the indicator cross. The direction of the trade should be in the direction of the cross. How this oscillator behaves is ultimately determined by what period of observation you choose and can yield variable results.

If you download a Center of Gravity indicator, you'll have a variety of choices and the differences can be significant. Some plot a COG channel on the actual chart, while some plot an oscillator below the main chart as shown above.

MetaTrader 4 Supreme Edition uses the COG principles to offer a version that is incredibly simple to use and understand. So if you are looking for a really straightforward COG indicator, you may find this is the best Center of Gravity indicator for you. It is a leading indicator that plots clear support and/or resistance lines to aid your decision making.

MetaTrader 4 Supreme Edition is a plugin that gives you a special, extended version of MT4. When you download MT4SE you don't just get an MT4 Center of Gravity indicator in isolation. Instead, you get a whole tranche of tools and extra functionality that have been chosen and developed by professionals.

Once you have downloaded MT4SE, you will see the indicator listed as Admiral Gravity in the Navigator.

The hourly USD/CHF chart below shows the Admiral Gravity indicator in use:

The indicator looks back at historical data, applies a weighting in favour of newer prices, and then calculates zones of resistance and support. The Admiral Gravity indicator displays these zones as coloured bands, as you can see on the right hand side of the chart. The darker the blue you see, the stronger the indicated support or resistance.

In keeping with conventional theory of price action, the price is likely to rebound from these bands of support or resistance. Should the price clearly break through the darkest blue band, it may indicate the formation of a new trend.

Blue is the default colour for the bands, but can easily be configured to any colour of your choice. Another aspect you can change is the time period, with a choice between a normal calculation or a shortened version for smaller durations.

It's also possible to alter the area of reference. To do this, you simply need to draw a vertical line on the chart then edit the line and change the Name field to GStart.

The hourly AUD/USD chart below shows this in action:

Notice how it drags the bars across the chart to wherever you have chosen to place the vertical line.

When to use a Center of Gravity Forex strategy

As we said in the introduction, COG is a leading indicator. Leading indicators tend to be useful in range-bound markets and can be used to identify where the upper and lower bounds of the range are likely to be. This aids in trading turning points in the price.

The Center of Gravity system is ill-suited to a trending market, though, as trying to trade these inflexion points in such circumstances can be risky. It's important, therefore, to first identify a range-bound market.

We want a market that is fluctuating regularly up and down, but with no clear overall net movement. You might find that another indicator or combination of other indicators will aid you in identifying a sideways moving market.

It's a general piece of wisdom that the utility of a technical indicator can be enhanced by comparing its findings with that of another indicator. The best indicator in the world is going to be wrong a fair amount of the time. So it's a great idea to try and winnow out as many false signals as you can.

The Admiral Gravity indicator is great because it's so simple and easy to use, but it's more useful as a general guide to areas of support and resistance. You probably want to use it in combination with another tool to firm up your trading signals.

As an example, the screenshot below shows default-value Keltner Channels overlaid on an hourly AUD/USD chart:

Can you see how the lower Keltner channel and the blue support zone tally up in a couple of places? Notice also how the market bounces off these poidants.

The Keltner channel indicator is another one of the tools that come as part of MetaTrader 4 Supreme Edition. You can find out more by reading our rundown of the MetaTrader 4 Supreme Edition Indicator Package.

Center of gravity Forex strategy: the final word

As we discussed earlier, there are a number of different types of MT4 COG indicators out there available to download. Whichever ones you choose to look into, make sure you try them out first without risking real money.

Our risk-free demo trading account offers an excellent environment for experimenting with different indicators and strategies. Doing so will allow you to determine which center of gravity Forex indicator is the best for you.

We hope you found this discussion of the Centre of Gravity Forex indicator useful, and it proves a profitable tool for your trading.