Elder Impulse System – Strategy And Rules
Trading smart means using the right tools to gain meaningful insights into the markets, find the right opportunities, and enter and exit the market fast, just like the professionals do — one tool that can help you achieve this is the Elder Impulse System. Want to know about this trading system?
Created by Alexander Elder, the Elder Impulse System is a technical tool that paints the price bars with certain colors if the component indicators — a 13-day exponential moving average and the MACD-Histogram — behave in a certain way. The system is designed to identify inflection points where a trend speeds up or slows down.
In this post, we will take a look at most of the questions you may have about the Elder Impulse System: what it is, how it works, and how you can improve your trading strategies with it. Keep reading!
Key takeaways
- The Elder Impulse System was created by Alexander Elder as a technical analysis tool.
- It uses a 13-day exponential moving average (EMA) and the MACD histogram to determine price bar colors.
- The EMA slope indicates the trend direction. The rise or fall of the MACD histogram measures momentum.
- The system combines trend-following and momentum strategies to highlight tradable i
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What is the Elder Impulse System?
Created by Alexander Elder, the Elder Impulse System is a technical tool that paints the price bars with certain colors if the component indicators — a 13-day exponential moving average and the MACD-histogram — behave in a certain way. The slope of the exponential moving average (EMA) identifies the trend, while the rise or decline of the MACD histogram measures momentum. Thus, the Elder Impulse System combines trend-following and momentum strategies to present tradable impulses.
The system is designed to identify inflection points where a trend speeds up or slows down. When both the 13-period EMA and the MACD are rising, it starts printing green bars, indicating that the bulls are dominating and are in control of both the trend and the momentum. On the other hand, when both the 13-period EMA and the MACD are falling, the system starts printing red bars, indicating that the bears are dominating and in control of both the trend and the momentum. However, if neither the bulls nor the bears are dominating — that is, the EMA and MACD are moving in opposite directions — the system prints blue bars.
Elder Impulse system trading strategy – rules, settings, and returns
A backtested strategy is coming shortly.
How does the Elder Impulse System work?
The Elder Impulse System works as a combined trend-following and momentum strategy that is designed to identify inflection points where a trend speeds up or slows down. It uses a 13-period EMA to identify the trend and the MACD histogram to gauge market momentum.
The system gives a bullish signal (prints green bars) when both the 13-period EMA and the MACD are rising, which shows that bulls are in control of both the trend and the momentum. It gives a bearish signal (prints red bars) when both the 13-period EMA and the MACD are falling, indicating that the bears are in control of both the trend and the momentum. When neither the bulls nor the bears are dominating — that is, the EMA and MACD are moving in opposite directions — the system prints blue bars.
Even though the system already has a trend component, Elder advises trading it in the direction of a higher timeframe trend. The higher timeframe for the main trend should be about 5x the trading timeframe. For instance, if you have the indicator on the daily timeframe to identify trade setups, you should identify the trend with a 13-period EMA on the weekly timeframe or put a 65-period (13×5) EMA on the daily timeframe to identify the main trend. if you are trading on the 4-hourly timeframe, you can look for the main trend on the daily timeframe.
Who created the Elder Impulse System?
The Elder Impulse System was created by Dr. Alexander Elder. He introduced the indicator to the trading community in his book, “Come Into My Trading Room”, which was released in April 2002. It’s one of his bestselling books. Elder is not just a renowned expert in technical analysis and trading psychology but also a professional trader and a teacher of traders, who has been in the trading game for more than four decades. He is also a practicing psychiatrist.
Why should traders use the Elder Impulse System?
There are many reasons why traders should use the Elder Impulse System. One of them is that the system uniquely combines trend-following and momentum indicators to generate signals only when the market is both trending and the momentum is rising in the direction of the trend. Also, Elder recommends using the signal only if it occurs in the direction of a 5x-higher timeframe trend. So, the system encourages traders to patiently wait for trades that occur in the strong trends, profit from the rising momentum, and quickly exit from the market — just like professionals do.
What are the key components of the Elder Impulse System?
The key components of the Elder Impulse System are as follows:
- A 13-period EMA: This is a part of the 2 trend and momentum indicators that generate the color-coded price bars of the system. The slope of the 13-period EMA shows the direction of the trend in the trading timeframe. If it is sloping up, the trend is up, and if it is sloping down, the trend is down. A signal is generated only when the slope matches the behavior of the MACD histogram.
- The MACD histogram: This is the second part of the Impulse system that generates the color-coded price bars. It is the histogram of the usual MACD indicator with 12, 26, and 9 settings. When its movement matches the slope of the 13-period EMA, green or red bars are printed, depending on the direction — green in a rising market and red in a falling market. When both are out of phase, blue bars are printed.
- A higher timeframe EMA: Elder recommends adding a higher timeframe 13-period EMA to determine the direction of the main trend and trade only the signals in that direction. The higher timeframe should be 5x the trading timeframe. So, 5x the 13-period EMA (65-period EMA) on the trading timeframe can be used to show the direction of the main trend.
How is the Elder Impulse System calculated?
The Elder Impulse System is calculated as follows:
Green Price Bar:
(13-period EMA > previous 13-period EMA) and
(Current MACD-Histogram > previous period’s MACD-Histogram)
Red Price Bar:
(13-period EMA < previous 13-period EMA) and
(Current MACD-Histogram < previous period’s MACD-Histogram)
Blue Price Bar: the conditions for a Red Price Bar or Green Price Bar are not met.
Note that the MACD-Histogram is based on the usual MACD(12,26,9) setting.
What are the main signals in the Elder Impulse System?
The main signals in the Elder Impulse System are as follows:
- Bullish signal: The system gives a bullish signal when both the 13-period EMA and the MACD are rising, which shows that bulls are in control of both the trend and the momentum. It appears as green price bars.
- Bearish signal: This appears as red price bars and is generated when both the 13-period EMA and the MACD are falling, indicating that the bears are in control of both the trend and the momentum.
- Neutral signal: This appears as blue price bars and is generated when the EMA and MACD are moving in opposite directions — that is, the trend and the momentum are out of phase.
How does the Elder Impulse System compare to other indicators?
Compared to other indicators, the Elder Impulse System is more like a trading system than an indicator. While other indicators use some mathematical formulas to compute price and/or volume data to help in technical analysis, the Elder Impulse System uses a combination of two indicators to assess when there is a potential trading opportunity in the market and prints the signal as color-coded price bars. The system also recommends how and when to use it to make a cautious entry and a fast exit from the market. It is designed to profit from small price movements that present as trading opportunities when momentum is rising in the direction of the trend.
When should you use the Elder Impulse System?
You should use the Elder Impulse System only when the market is trending, and the signal occurs in the direction of the higher timeframe trend. This is identified by a 13-period EMA of the higher timeframe, which should be about 5x your trading timeframe. So, if you’re trading on the daily timeframe, you look for trend direction with a 13-period EMA of the weekly timeframe, which is equivalent to a 65-period (13×5) EMA on the daily timeframe.
When the higher timeframe EMA is sloping upward, you should trade only in the upward direction. That means trading only bullish signals (green bar). When the higher timeframe EMA is sloping downward, you should trade only in the downward direction. That means trading only bearish signals (red bar).
What markets can the Elder Impulse System be applied to?
The Elder Impulse System be applied to any market that publishes reliable and consistent price data. Since the system uses only price-based indicators (and not volume-based ones), it can be used in any market including the spot forex market, where there’s no volume data. While you can apply the system to any market, it works in markets that are trending strongly. The system only enables you to profit from trading opportunities that present themselves when momentum is rising in the direction of the trend.
How do you interpret Elder Impulse System signals?
To interpret Elder Impulse System signals, you have to attach a higher timeframe 13-period EMA to identify the direction of the main trend. Generally, a green bar suggests a bullish signal, while a red bar suggests a bearish signal. But they cannot be tradable signals unless they occur in the direction of the higher timeframe trend.
So, a buy signal is a green bar when the higher timeframe 13-period EMA is sloping upward. A sell signal is a red bar when the higher timeframe 13-period EMA is sloping downward.
What are the strengths of the Elder Impulse System?
Some of the strengths of the Elder Impulse System include:
- The system is both trend and momentum based.
- It combines a trend indicator and a momentum indicator to target the inflection point in the trend when the price momentum is rising in the trend direction.
- It encourages the trader to wait for the right time when the trend and the momentum are in phase so they can profit from the momentum surge and exit as early as possible.
Are there any weaknesses in the Elder Impulse System?
Yes, there are weaknesses in the Elder Impulse System. These are some of them:
- The system waits for the trend and momentum to align before generating a signal, but that does not guarantee that the price will keep moving afterward.
- It does not follow the buy low and sell high principle of financial trading — waiting for trend and momentum indicators to align could mean buying high with the hope the market will move higher.
- It misses the early swings before the moving average and the MACD changes direction to align with each other.
How does the Elder Impulse System identify trends?
The Elder Impulse System identifies trends using the direction of the slope of a 13-period EMA. When the slope of a 13-period EMA is pointing upward, the trend is in the upward direction. Likewise, when the EMA’s slope is in the downward direction, the trend is to the downside. This is true for both the trading timeframes trend used in printing the price bar signals and the 5x higher timeframes trend used in spotting the main trend direction.
What is the role of colors in the Elder Impulse System?
The role of colors in the Elder Impulse System is to provide an easy way to see the signals. Green, red, and blue are usually the default colors, with the green color giving a bullish signal, the red color providing a bearish signal, and the blue color indicating no signal (neutral signal). However, traders can customize the indicator and use their preferred colors for the bullish, bearish, and neutral signals.
How can the Elder Impulse System improve trading strategies?
The Elder Impulse System can improve trading strategies by showing the inflection point where the trend is experiencing an increase in momentum. This can help traders to be more cautious with their entries and wait for the momentum and trend to be in phase to increase the odds of profitable trades. However, the impulse system can only improve trend-following and momentum trading strategies that. It cannot improve strategies that are based on mean reversion or countertrend trading.
Can the Elder Impulse System be used for day trading?
Yes, the Elder Impulse System can be used for day trading. All you need is to select the right timeframe and set up your higher timeframe EMA accordingly. Your trading timeframe can be the hourly, 30-minute, or 15-minute timeframe. This is where you attach the Elder Impulse system to print color-coded price bar signals. Also, you set up a 5x timeframe 13-period EMA to identify the main trend. The easiest way to do it is to set up a 65-period EMA on the trading timeframe — whatever the timeframe of choice is.
How does the Elder Impulse System work in volatile markets?
The Elder Impulse System can work in volatile markets if the market is trending in one direction. In such a situation, the market would be experiencing high momentum because of bigger price impulses. However, if the market is very volatile and spiking in both directions, there would be no momentum in any direction, and thus, the Elder Impulse System would print mostly blue bars. Even when it prints a green or red bar, the odds of profitable trades are very low.
What software supports the Elder Impulse System?
Most trading software supports the Elder Impulse System. The system may not be one of the built-in indicators in some trading platforms, but you can find a custom-made Elder Impulse System for many platforms, including cTrader, MetaTrader 4, and MetaTrader 5 platforms. TradingView and other charting platforms have the system as one of the community-built indicators. But even if you can’t find the indicator in your trading platform, you can easily get a programmer to create a custom one for you, as it is based on already existing indicators.
What is the history of the Elder Impulse System?
The history of the Elder Impulse System dates back to April 2002 when the renowned trader and trading psychologist, Dr. Alexander Elder, released his bestselling book, Come into My Trading Room. According to Dr. Elder, he created the system to have a way to use market trends and momentum to generate potential entry and exit signals. He designed the system to be simple and easy to use, so traders can quickly identify inflection points in trends and quickly make trading decisions.
How does the Elder Impulse System relate to Alexander Elder’s other work?
The Elder Impulse System relates to Alexander Elder’s other work in that it makes use of the 13-period EMA, which is a common indicator in other Elder’s works. In the Impulse System, he brought his decades of experience to create something special. He combined a trend and a momentum indicator to find the inflection point in the trend, which can provide quick profit-making opportunities.
Can the Elder Impulse System be used with other indicators?
Yes, the Elder Impulse System can be used with other indicators. You just need to find trend indicators and momentum oscillators that can complement it. Examples include simple moving averages, ADX, and momentum oscillators. If you’re trading stocks, you can also use volume indicators.
What are common mistakes when using the Elder Impulse System?
Some common mistakes when using the Elder Impulse System include:
- Trading with the system without first backtesting it to be sure it has an edge in the market you’re trading
- Trading without an adequate risk management plan
- Risking too much per trade because you think the system is great and can make you money
- Trading in a choppy market
How do you customize the Elder Impulse System for different markets?
To customize the Elder Impulse System for different markets, you have to backtest it in the different markets to know how the system performs in those markets. During the backtesting, you can experiment with other settings, apart from the default settings to find the best setting for each market.
What are the best resources to learn the Elder Impulse System?
The best resources to learn the Elder Impulse System include Dr. Elder’s bestselling book, Come Into My Trading Room, and Henri van Maarseveen’s guide on the trading system titled, “Elder Impulse System: A Step-by-Step Guide to Successful Forex Trading”.