Elder Impulse System is a trading strategy developed by Dr. Alexander Elder. It’s designed to help traders spot and act on market trends in a straightforward way.
The Elder Impulse System combines different tools to identify market trends and momentum, making it easier to decide when to buy or sell. It’s appreciated for its simplicity and effectiveness in trading.
In This Post
How the Elder Impulse System Works
The Elder Impulse System is designed to help traders make clear buy or sell decisions based on the interaction of moving averages and the Force Index. Here is a simplified, step-by-step explanation of how the system works:
1. Determine the Trend
Begin by examining a long-term chart to identify the primary trend. For instance:
If the 50-day Simple Moving Average (SMA) is above the 200-day SMA, the market is in a bullish (upward) trend.
On the other hand, if the 50-day SMA is below the 200-day SMA, the market is in a bearish (downward) trend.
2. Confirm Momentum
Check Momentum: Next, use the Force Index to confirm the strength of the trend:
Positive Force Index: Indicates strong buying pressure, supporting a bullish trend.
Negative Force Index: Suggests selling pressure, supporting a bearish trend.
3. Generate Buy/Sell Signals
Buy Signal
Then the short-term moving average (like the 13-day Exponential Moving Average, EMA) crosses above the long-term moving average (like the 50-day SMA). Ensure the Force Index is positive, indicating buying pressure.
Sell Signal
When the short-term moving average crosses below the long-term moving average.
Ensure the Force Index is negative, indicating selling pressure.
4. Timing Entries and Exits
Use a shorter-term chart to pinpoint precise entry and exit points:
For example, enter a trade when the price pulls back to the short-term moving average during a confirmed trend. This can help you buy at a better price or exit at a strategic point.
Components of the Elder Impulse System
1. Elder’s Triple Screen Trading System
This part of the Elder Impulse System involves looking at the market from different perspectives to get a clearer picture of the trend. It’s called a “triple screen” because it uses three different timeframes:
Screen 1: Long-Term Trend – First, you check a long-term chart, like a weekly or daily chart, to see the overall trend. This helps you understand the bigger picture.
Screen 2: Intermediate Trend – Next, you use a medium-term chart, like a daily or 4-hour chart, to see how the trend is developing. This gives you a sense of the trend’s strength and direction.
Screen 3: Short-Term Timing – Finally, you look at a short-term chart, like a 1-hour or 15-minute chart, to pinpoint the best times to enter or exit trades.
By looking at the market from these different angles, you can filter out unnecessary noise and focus on significant trends.
2. Elder’s Force Index
The Force Index is a tool that measures the strength of price movements. It combines two factors:
Price Change: How much the price has moved.
Volume: How many trades were made.
When combined, these two factors show how strong a buying or selling push is. If the Force Index shows strong buying pressure, it supports a bullish trend. If it shows strong selling pressure, it supports a bearish trend.
3. Moving Averages
Moving averages help you determine the direction and strength of a trend. The Elder Impulse System typically uses two types:
- 13-Day Exponential Moving Average (EMA): This gives more weight to recent prices and responds quickly to price changes.
- 50-Day Simple Moving Average (SMA): This gives an average of prices over the past 50 days, smoothing out the data to show the general trend.
When the short-term EMA crosses above the long-term SMA, it signals a potential buying opportunity. When the EMA crosses below the SMA, it signals a potential selling opportunity.
Application of Elder Impulse System in Forex Trading
1. Identify the Primary Trend
Start by looking at a longer-term chart (like a daily chart) to determine the overall market direction. This ensures that you are trading in the direction of the trend, which is generally more favourable than trading against it.
2. Validate with Force Index
Check the Force Index to validate the trend:
- A strong positive Force Index supports a bullish trend and increases confidence in buy signals.
- A strong negative Force Index supports a bearish trend and increases confidence in sell signals.
3. Refine Trade Entries
Use a shorter timeframe (like a 15-minute chart) to look for the best entry points.
For example, if a buy signal is generated, wait for a pullback or consolidation on the short-term chart before entering the trade. This can help you enter at a more favourable price.
4. Set Stop-Loss and Take-Profit Levels
Based on the signals and your risk tolerance, set appropriate stop-loss and take-profit levels:
- Stop-loss: A level where you will exit the trade if the price moves against you, limiting your losses.
- Take-Profit: A level where you will exit the trade to lock in profits when the price reaches your target.
Example of the Elder Impulse System in Forex
Some examples using the EUR/USD currency pair:
Identify the Trend:
On a daily chart, observe that the 50-day SMA is above the 200-day SMA. This indicates a bullish trend.
Confirm Momentum:
Check the Force Index on a 4-hour chart. If it is positive and increasing, this confirms buying pressure and supports the bullish trend.
Generate Buy Signal:
On a 1-hour chart, you see that the 13-day EMA has crossed above the 50-day SMA, aligning with the bullish trend. This crossover, combined with a positive Force Index, signals a potential buying opportunity.
Refine Entry:
Enter a long position when the price pulls back to the 13-day EMA. This ensures you are buying at a better price within the uptrend. Set a stop-loss slightly below the recent swing low to manage risk.
Advantages of the Elder Impulse System
1. Clarity and Structure
The Elder Impulse System offers a clear, organized method for trading. It combines trend analysis with momentum indicators, which helps traders make decisions based on a structured framework rather than guesswork. This clarity makes it easier for traders to follow and apply consistently.
2. Trend Confirmation
By using charts from different timeframes (long-term, intermediate-term, and short-term), the system helps confirm trends and avoid misleading signals.
The Force Index adds another layer of validation by measuring the strength of buying or selling pressure, which further supports the accuracy of trend confirmation.
3. Versatility
The system is flexible and can be used effectively across various trading styles and timeframes. Whether you are a day trader who focuses on short-term movements or a swing trader who looks for longer-term trends, the Elder Impulse System can be adapted to fit your needs.
Limitations of the Elder Impulse System
1. Lagging Indicators
The system relies on moving averages and the Force Index, both of which are lagging indicators. This means they reflect past price movements and may not always capture the very beginning of a new trend. As a result, there might be a delay in signals, which can affect the timing of your trades.
2. Complexity for Beginners
The system’s multi-timeframe approach and the interaction between various indicators can be challenging for novice traders.
Understanding how to effectively use different charts and indicators requires practice and experience, which might be daunting for those just starting out in trading.
3. False Signals
In sideways or choppy markets, where prices move within a narrow range, the Elder Impulse System might produce false buy or sell signals.
Frequently Asked Questions
1. What indicators are used in the Elder Impulse System?
The system uses moving averages and the Force Index to analyze trends and momentum.
2. What is the role of the Force Index in the Elder Impulse System?
The Force Index measures the strength of buying or selling pressure, helping confirm trends.
3. How do you set up the Elder Impulse System?
The system is set up by using multiple timeframes for trend analysis and applying the Force Index along with moving averages.
4. Is the Elder Impulse System effective in day trading?
Yes, the system is effective in day trading when combined with short-term charts to refine entries and exits.
Conclusion
The Elder Impulse System is a powerful tool for traders seeking a structured approach to trend and momentum analysis.
Its clarity, ability to confirm trends, and versatility across different trading styles make it a valuable addition to many trading strategies.
However, it’s essential to be aware of its limitations, such as the lagging nature of indicators, potential complexity for beginners, and the risk of false signals in choppy markets.
When you understand its advantages and limitations, you can use the Elder Impulse System more effectively and integrate it with other tools to enhance your trading decisions.
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