• : January 11, 2021
  • : Prashant Shah

Elder Impulse System

The Elder Impulse system was designed by Dr Alexander Elder and explained in his book ‘Come into My Trading Room’.

It is developed using two indicators: Exponential Moving Average (EMA) and Moving Average Convergence Divergence (MACD - Histogram).

Idea of the impulse system is to identify the stocks in strong trends and momentum. Moving average is applied to identify the trend and MACD-Histogram to measure the momentum.

EMA indicator gives more weightage to recent price bar compared to other format of moving averages. MACD indicator line in moving average calculates difference between two moving averages. Signal line of MACD indicator is average line of MACD line.
 

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Histogram in MACD indicator measures the difference between MACD line and signal line. Increasing distance (rising Histogram) shows difference between short-term and medium-term moving average is rising rapidly hence there is a strong momentum in short-term.

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Click here to know more about MACD indicator.

Elder recommends 13-period parameter for EMA and 12,26,9 for the MACD.
Rules of the system:
 
  1. When EMA is rising = Trend is bullish
  2. When MACD Histogram is rising = Strong bullish momentum
A + B = Bullish EIS
  1. When EMA is falling = Trend is bearish
  2. When MACD Histogram is falling = Strong bearish momentum
C + D = Bearish EIS
If above conditions are not met, EIS is neutral.

How it is plotted on charts generally: Color of bar or candle changes as per the EIS system. There will be green or bullish bar if EIS is bullish, bearish bar if EIS is bearish and another color for neutral bars.

How it is plotted in TradePoint?

Go to Add study -> Indicators -> Elder Impulse System

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EIS indicator will get plotted below the chart.

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  • Indicator reading would be 2 and the color would be green when EIS is bullish.
  • Indicator reading would be -2 and the color would be bearish when EIS turns bearish.
  • Zero reading of indicator shows neutral EIS reading.
This type of histogram plotting makes it more readable and useful. ou can also create system using this indicator in system builder. All three conditions of bullish zone, bearish zone and neutral zone are clearly defined in the system builder.

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You can also use it in combination with other indicators or price patterns.

Variation

Increasing momentum is defined as increasing histogram bars. At times, the distance between MACD line and signal line reduces temporarily during strong trends. Histogram remaining above zero line also defines the strong momentum.

You can see the Type in indicator while applying EIS on the chart.

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If you select MACD above zero type, then nature of EIS will change.

See below chart with both the options on Nifty candlestick chart.
 
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The indicator becomes much stable when MACD type above zero is used.

Major learning from EIS system is how two indicators are combined to create the system. It can be traded on different timeframes. For intraday, 15-min timeframe seems more useful.

This indicator can also be traded on P&F, Renko, Line-break or Heikin-ashi charts. Setting for Renko chart should be 40-brick EMA and 40,100,40 brick MACD Histogram. 

Below is an example of EIS on a Renko chart.


The bullish price patterns of Noiseless charts when EIS is bullish and bearish patterns when EIS is bearish are tradeable. Ignore breakouts when EIS is in neutral zone.