As ever, the Trader’s Bulletin moto is: why pay for something if you don’t have to?! Which is why I want to show you this is a great trading system. Here’s why I love it …
- It comes with its own intuitive candles – specially colored to tell you when it’s a signal, so any fool (i.e. me) can read them …
- The clever candles take into account both trend and momentum (that’s the important work done for us)
- And, I’ve just discovered that it’s available with one click on your trading platform!
What’s not to love?
So, let’s see how it works …
The Elder Impulse trading system has been around a few years, developed by Alexander Elder. It uses special price bars which instantly tell you by their colour whether the market is bullish or bearish.
When I realized that these price bars were available on my broker’s platform, I thought I should tell you about them, and how to put them to some great use in your trading.
The lovely thing about Elder’s price bars is that they combine two really important factors for getting into a trade – trend and momentum. It’s looking at both the 13-bar exponential moving average and the MACD– measuring the angle of the moving average and the relative sizes of the histogram bars. In my view, these are two really smart indicators. If these two factors are agreement – we get a signal.
Here’s what Elder says about his system: “The Impulse System encourages you to enter cautiously but exit fast. This is the professional approach to trading, the total opposite of the amateur’s style. Beginners jump into trades without thinking too much and take forever to get out, hoping and waiting for the market to turn their way.”
I couldn’t agree more. So, here’s what the bars look like on your chart …
The green ones are buy signals; the red ones sell signals.
But there’s another factor to take into account – we have to trade with the longer-term trend. Elder recommends the current timeframe multiplied up by 5. So, if you’re trading a daily chart, you could look at the trend on a weekly chart. Alternatively, you can just multiply up your 13EMA by 5, to give us a 65EMA on our chart – this will show the longer-term trend.
Bear in mind that the 65-bar EMA is on there to show us the longer term trend, so a nudge above this level isn’t enough for a signal – it needs to be a clear, significant breach.
As I said earlier, this system is about getting out quickly. It’s trading momentum, so if that momentum fades, we get out. We don’t wait for a sell signal to get out of a buy trade, or a buy signal to get out of a sell trade. We’ll jump ship as soon as there’s a blue price bar.
Here’s an example on an hourly of how trades could look …
Note, I’ve waited until a full candle (of the right colour) has opened and closed above or below the 65EMA before it’s a signal to buy or sell. I’m then entering at the start of the next candle. I’d expect to see quite a few trades resulting in small losses or breakeven, as we’re waiting for the big momentum moves, where we can catch the swings, and take profits on the pullbacks.
A sensible place for stops would be behind a recent high or low – we’re getting out fast if momentum dips, so there’s no need for really wide stops.
As with any trend-following system, it’ll do better when the markets aren’t chopping about, so it might be possible to add an extra trade filter in there, like an ADX level that you want to be above before entering a trend.
In theory, the Elder Impulse system can work on any timeframe, but longer timeframes will allow you to catch those nice big moves, and not get stung with costs on numerous small losses and breakeven trades.
I look forward to hearing how you get on with it (please leave your comments below) …
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