When first getting started in trading, it is wise to research what resources experienced traders often use. In his book Come Into My Trading Room, Alexander Elder wrote about the Elder Impulse System that he made. Elder states that “the system finds inflection points when a trend accelerates or decelerates.”
The Elder Impulse System (EIS) is a powerful trading tool for technical analysis that combines two separate indicators. It is important for spotting changes in trends and figuring out when to get into and get out of trades. Even though this trading method works well on its own, it can be improved by using other methods of technical analysis. Any asset class and time frame are both suitable for use with the EIS.
To fully grasp how to use the Elder Impulse System in your trading, you must read this article to the end.
What is the Elder Impulse Indicator
The Elder Impulse System indicator looks for changes in the speed of trends, whether they are going up or down. Indicators for the Impulse System include a 13-day exponential moving average and the MACD histogram. The moving average is used to spot trends, whereas the MACD histogram evaluates the rate of change. This is why the Impulse System uses both trend following and momentum to find price volatility that can be traded. Consequently, the Elder Impulse System includes trend-following and momentum to display tradeable impulses. The price bars are color-coded to make this unique indicator combination easy to see.
When the market is in an uptrend and experiencing good momentum, the bars will be green. Bearish market conditions, which are shown by red bars, happen when the trend goes down but momentum goes up. When neither bulls nor bears are dominating the market, the indicator will show a gray bar.
Elder Impulse Strategy
The first is to rely only on the indicator and not on any other trading strategies. The bulls have control of both trend and momentum, as seen by the green price bars and the rising 13-day exponential moving average (EMA) and MACD-Histogram. As the MACD-Histogram and the 13-day Exponential Moving Average (EMA) both decline, a red price bar shows that the bears have gained control of the market. Traders may choose to open positions in the corresponding direction.
When the price bar is blue, it means that neither buyers nor sellers are in control of the market conditions.
When trading using the Elder Impulse Indicator, it’s important to be in step with the overall trend, even if it means using a different time frame. According to Elder, you should choose an arbitrary time frame, label it “intermediate,” and then increase that number by a factor of five to reach your long-term time frame. Traders who are used to using daily charts for a medium-term view can easily switch to weekly charts for a long-term view.
Keep in mind, too, that this indicator can’t tell you how long the trend will last. The end of the current trend, therefore, can never be predicted with any certainty. Trading volume is often greater during the start of major trends, making volume indicators useful. Also, keep in mind that Elder Impulse System, like any other technical analysis instrument, cannot guarantee to always deliver the correct signals. At times, it will give you an erroneous signal. It is your responsibility as a trader to spot and discard such opportunities.
- When the long-term trend is bullish and the Elder Impulse System becomes bullish on the intermediate-term trend, a buy signal is generated. In other words, a clear uptrend must exist on the weekly chart for a daily buy signal to be valid. Daily buy signals that occur when the weekly chart is not exhibiting an uptrend are disregarded.
- When the long-term trend is bearish and the Elder Impulse System becomes bearish on the intermediate-term trend, a sell signal is generated. For a daily sell signal to be genuine, for instance, the weekly chart must show a definite decline. Daily sell signals that occur when the weekly chart is not clear in a downtrend are disregarded.
Elder Impulse Indicator Pros & Cons
- Confirm bullish and bearish setups using the Impulse System.
- It can be used to validate trade setups.
- It can be used to identify ideal entry and exit points
- This indicator is unable to determine the trend’s duration.
- Will be lots of false signals that you need to filter.
You can take advantage of short-term market volatility and trading opportunities with the Elder Impulse System. The Elder Impulse System can be used for more than just setting up trades; it can also help you stay out of trades that are going to lose. Confirm bullish or bearish setups with the help of the Impulse System.
It is not recommended to trade bullish setups when the Impulse System is not in full-blown bull mode (green bars) or bearish signals when the system is not in full-blown bear mode (red bars). With the help of the impulse system, you can also guess patterns or changes. The Impulse System can be used to confirm a short-term reversal, such as when a bull flag is suspected to be forming or when a Fibonacci retracement is expected to provide support.
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