Trading strategy: Centre of Gravity - Belkhayate

Description

The Centre of Gravity (COG) strategy is based on the premise that the market prices evolve around a "centre of gravity". When the market price deviates strongly from this centre of gravity the probability is considered high that the market price will evolve back towards the centre of gravity.

This trading strategy is also called the Belkayate COG strategy. E.M. Belkayate is a technical analyst and the inventor of the strategy. The COG strategy is popular in France. In 2009 it was awarded the golden trophy during the technical analysis fair in Paris.

 Suitable for : Market indices (FTSE, CAC, DAX ...) : Forex (EUR/USD, GBP/USD …) : Commodities (oil, gold …) Instruments : Futures and CFDs Trading type : Swing trading Trading tempo : Low - 3 to 4 signals per month The strategy : Video Using NanoTrader Full : Manual or automated Video

When to open a position?

A position is opened when the real market price deviates significantly from the centre of gravity of the market price. Belkhayate calculates the centre of gravity on the basis of a 4-hour chart and visualizes it as a single line (blue in the below screenshot). Belkhayate also calculates three bands each above and below the centre of gravity line. These bands are calculated on the basis of statistically significant values and Fibonacci numbers.

When the market price enters the third band it is considered as a significant deviation from the centre of gravity. Belkhayate argues that the probability of the market price evolving back towards the centre of gravity is 90%. When the market price deviates into the upper, red band the trader opens a short position based. He expects the market to go down, towards the gravity line. When the market price deviates into the lower, green band the trader opens a long position. He expects the market to rise, towards the gravity line.

Attention. Positions are only opened in the direction of the trend. To determine the trend simply use the gravity line itself. If the gravity line slopes upward the trend is bullish and only buy signals are acted upon. If the gravity line slopes downward the trend is bearish and only short sell signals are acted upon.

Attention. Belkhayate limits himself to stating that a position can be opened when the market price enters the third band. A trader requires a more precise rule to base his decision to open a position on. One suggestion is to only open a position only after the first candle closes within the third band.

This example shows three candles which penetrate the third band. Only the third candle actually closes within the third band. The position is opened at the opening price of the next, new candle.

An alternative for the even more prudent trader is to open the position only when the market price hits the outer edge of the third band.

Attention. The COG bands are dynamic. They are not static. The centre of gravity line and its related bands change based on the current market price. It is entirely possible that a signal located in the third band today, visually, no longer lies in the third band tomorrow. Given the dynamic nature of the bands it is not possible to back-test this strategy.

When to close a position?

In order to close a position traders can rely on Belkhayate’s COG timing indicator. This indicator is an oscillator which oscillates through three zones: the neutral zone in the middle, the exit zones and the alarm zones. In the neutral zone nothing happens. In the exit zones positions can be closed. The alarm zones can correspond with entry signals.

The COG Timing indicator gives the impression that the full potential of a trade is not exploited. As a stop the indicator also appears less suitable. Traders could use one of two alternatives: the ATR or the Slow Stochastics. In practice the Slow Stochastics probably enjoy a slight preference as a combination with the COG strategy.

Alternative 1: Target price and stop can be determined on the basis the ATR (average true range). Traders should respect a return-risk ratio of 2 or more when determining their target and stop. If the target is 2x ATR then the maximum stop can be 1x ATR.

Alternative 2: A Slow Stochastics cross can also be used to close positions. An exit based on a stochastics cross is simple in that it does not require a target and a stop. A short position is closed when the fast stochastic crosses the slow stochastic upwards. A long position is closed when the fast stochastic crosses the slow stochastic downwards.

In this screenshot a short position (-1) is opened when the market price deviates into the third, upper band. The position is closed when the fast stochastic crosses the slow stochastic upwards.

Conclusion

The Centre of Gravity strategy is precise regarding entry signals. The exit rules are a bit more vague. The trader can remedy this himself by using, for example, the Slow Stochastics. The COG strategy generates only about 4 signals per month per instrument. But given that the strategy can be applied to all indices, forex pairs, commodities ... traders can work with a wide range of instruments to make up for the infrequent signals.