The Elder Impulse System is a powerful trading strategy developed by Dr. Alexander Elder. It combines two key technical indicators: the Exponential Moving Average (EMA) and the Moving Average Convergence Divergence Histogram (MACD-Histogram). The Elder Impulse System is designed to identify points where momentum and trend are both aligned, allowing traders to spot potential trade setups.
In this post, we will explore various trading strategies using the Elder Impulse System, demonstrating how each can be applied in different market conditions and time frames. Let’s start by explaining the foundation of the Elder Impulse System.
What is the Elder Impulse System?
The Elder Impulse System is based on two critical components:
- 13-Period Exponential Moving Average (EMA): This helps identify the current trend of the market. When the price is above the 13-EMA, the market is considered to be in an uptrend, and when below, it is in a downtrend.
- MACD Histogram: The MACD histogram measures momentum. A positive histogram indicates bullish momentum, while a negative histogram suggests bearish momentum.
The combination of these two indicators generates signals based on trend and momentum, with the goal of helping traders enter trades at the ideal moment when the price and momentum are both aligned in the same direction.
The Elder Impulse System signals come in three colors:
- Green Bar: This signals bullish momentum and trend.
- Red Bar: This signals bearish momentum and trend.
- Blue Bar: This signals a neutral state or a potential transition point where neither momentum nor trend is dominant.
Components of the Elder Impulse System
- Trend Direction: Determined by the slope of the 13-period EMA.
- Momentum: Measured by the MACD histogram, which is used to capture the momentum behind price moves.
By combining these two factors, the system classifies the market into impulse signals and helps traders act accordingly. Now, let’s explore various strategies.
Strategy 1: Bullish Momentum Trend Strategy
Overview:
The Bullish Momentum Trend strategy is employed when both the trend and momentum are moving in the same direction, indicated by green bars in the Elder Impulse System. This strategy is suitable in a strong uptrend and is applicable across all time frames, though it is most effective on higher time frames like daily or weekly charts.
Rules:
- Look for a price above the 13-period EMA.
- Confirm that the MACD histogram is rising, indicating positive momentum.
- Enter a long position when the Elder Impulse System prints a green bar.
- Place a stop loss below the most recent swing low.
- Exit when the Elder Impulse System prints a blue or red bar, indicating a slowdown in momentum or trend reversal.
Example:
Assume you are trading the S&P 500 index on a daily chart. You observe that the price is above the 13-EMA and the Elder Impulse System prints consecutive green bars. This confirms that both the trend and momentum are bullish. You enter a long position and ride the trend until the system prints a blue bar, signaling a slowdown.
Application in Different Market Conditions:
- Trending Market: This strategy works best in trending markets where momentum is strong. In a bull market, green bars indicate the ideal time to enter long trades.
- Consolidating Market: Avoid using this strategy during consolidation, as false signals may occur.
Strategy 2: Bearish Momentum Trend Strategy
Overview:
The Bearish Momentum Trend strategy is the reverse of the bullish strategy. This strategy looks to capitalize on strong downtrends where both the price and momentum are aligned to the downside, indicated by red bars in the Elder Impulse System.
Rules:
- Look for a price below the 13-period EMA.
- Confirm that the MACD histogram is falling, indicating negative momentum.
- Enter a short position when the Elder Impulse System prints a red bar.
- Place a stop loss above the most recent swing high.
- Exit the trade when a blue or green bar appears.
Example:
Consider trading gold futures on a 4-hour chart. The price is trading below the 13-EMA, and the Elder Impulse System prints consecutive red bars. You initiate a short position and hold it until a blue bar signals the end of the bearish momentum.
Application in Different Market Conditions:
- Bear Market: Ideal for bear markets or when the asset is in a strong downtrend.
- Range-bound Market: Be cautious in range-bound conditions as momentum may shift frequently.
Strategy 3: Reversal Strategy
Overview:
The Reversal Strategy is used when the Elder Impulse System shifts from red to green (or vice versa), signaling a potential trend reversal. This strategy is useful when traders want to capture the beginning of a new trend.
Rules:
- Identify a trend change when the Elder Impulse System switches from red to blue and then to green, or from green to blue and then to red.
- Wait for a confirmation of the reversal with at least one bar in the opposite color.
- Enter the trade after confirmation and place a stop loss near the recent swing point.
- Exit when the system prints a bar in the opposite color.
Example:
In a stock like Apple (AAPL), you notice the Elder Impulse System changes from red to blue and then prints a green bar. This indicates a potential bullish reversal. You take a long position, setting your stop loss near the recent low, and ride the trend.
Application in Different Market Conditions:
- Volatile Markets: This strategy works best in volatile conditions where reversals are common.
- Consolidating Markets: Reversals can often lead to false signals in consolidating markets, so additional confirmation tools like volume may help.
Strategy 4: Breakout Strategy
Overview:
The Breakout Strategy using the Elder Impulse System aims to catch significant price moves when the market breaks out of a consolidation zone. The system helps to confirm breakouts with momentum and trend signals.
Rules:
- Identify a price consolidation or range.
- Wait for a breakout and the Elder Impulse System to print a green (bullish breakout) or red (bearish breakout) bar.
- Enter a trade when the breakout occurs with momentum, and the bar confirms the breakout direction.
- Place a stop loss just below or above the consolidation range.
- Exit when the system prints a neutral bar or when momentum begins to fade.
Example:
Let’s take the EUR/USD currency pair, which has been consolidating in a range for weeks. Suddenly, the price breaks out above the resistance level, and the Elder Impulse System prints a green bar. This signals a bullish breakout, prompting you to enter a long position.
Application in Different Market Conditions:
- Volatile Market: Best applied in volatile markets where breakout trades tend to offer significant price movements.
- Consolidation Phase: This strategy is especially useful in markets emerging from consolidation periods.
Strategy 5: Multi-Time Frame Strategy
Overview:
The Multi-Time Frame Strategy combines different time frames to filter trades and increase accuracy. A trader can use a higher time frame for trend identification and a lower time frame for entry signals.
Rules:
- On the higher time frame (e.g., daily chart), identify the trend using the Elder Impulse System.
- On a lower time frame (e.g., hourly chart), look for the same directional impulse (green or red bars) as the higher time frame to confirm the trade.
- Enter a trade when both time frames align.
- Place a stop loss based on the lower time frame’s recent swing points.
- Exit when the system prints a blue bar on the lower time frame.
Example:
On the daily chart of the Dow Jones Industrial Average, you see the Elder Impulse System printing green bars, indicating an uptrend. You switch to the 4-hour chart and wait for a green bar to align with the higher time frame’s trend. Once confirmed, you enter a long trade.
Application in Different Market Conditions:
- Trending Markets: Works well in trending markets where both higher and lower time frames align.
- Choppy Markets: Use caution in choppy markets where time frame alignment may not occur.
Conclusion
The Elder Impulse System is a versatile trading tool that can be applied in various strategies across different market conditions. From trend-following strategies in bullish and bearish markets to breakout and reversal strategies, the system provides traders with clear entry and exit signals. It can be applied to different time frames, making it suitable for day traders, swing traders, and long-term investors alike.
By combining the 13-EMA and MACD histogram, traders can capitalize on the dual forces of trend and momentum to identify profitable trade opportunities. The key to success with the Elder Impulse System lies in understanding the market condition and selecting the appropriate strategy. With proper risk management and patience, this system can help traders achieve consistent results in the financial markets.