Composite & famousElder Impulse System
Alexander Elder's bar-colouring system that combines trend and momentum into a simple traffic light.
Works in most conditionsEngine-computed on a fixed sample series
What it is
The Elder Impulse System, created by Dr. Alexander Elder, is a way of colouring each price bar (or candle) on your chart to tell you, at a glance, who is winning the fight between buyers and sellers. Instead of adding another squiggly line to read, it paints the bars themselves like a traffic light: green, red, or blue. It answers a very specific question — not should I buy, but am I allowed to buy or sell right now. It does this by checking two independent forces at once: the direction of the trend and the direction of momentum. If a beginner remembers one thing, it should be that the system is a filter of permission, telling you what NOT to do rather than handing you an entry.
How it is calculated
Two ingredients go into the colour of each bar. The first is a 13-period Exponential Moving Average of closing prices, which stands in for the trend — the system asks whether today's EMA value is higher or lower than the previous bar's. The second is the MACD histogram, the distance between the standard MACD line (the 12-period EMA minus the 26-period EMA) and its 9-period signal line — the system asks whether that histogram is rising or falling versus the prior bar. If both the EMA and the histogram are rising, the bar is painted green; if both are falling, it is painted red; if the two disagree, one up and one down, the bar is blue. So the colour is simply the agreement or disagreement of trend-slope and momentum-slope, bar by bar.
Reading it, step by step
A green bar means both trend and momentum point up, so bulls own the market for that bar; a red bar means both point down and bears own it; a blue bar means the two forces have split and the market is undecided. Elder's crucial insight is to treat the colours as censorship rather than as signals — green bars forbid you from shorting, red bars forbid you from buying, and blue bars remove all restrictions. The moments that matter most are the transitions: a shift from green to blue often marks the first cooling of an uptrend, and a shift from red to blue the first thaw of a downtrend. You are not looking for the colour to tell you to act; you are looking for it to remove a veto so a signal from your own method becomes tradeable. The absence of green does not mean sell — it simply means shorting is no longer banned.
Best timeframes and settings
The default 13-period EMA and 12/26/9 MACD were chosen by Elder for daily charts, and the system is at its most reliable on the daily and weekly timeframes where the two lagging inputs have room to breathe. Elder himself championed a triple-screen approach — read the impulse colour on a higher timeframe such as weekly to set direction, then drop to a lower one such as daily for timing. You can run it intraday on 15-minute or hourly bars, but the shorter the timeframe the more often the colour flickers between green, blue, and red, because both inputs react to every wiggle. Shortening the EMA or the MACD lengths to make it faster is usually a mistake — it multiplies blue bars and destroys the very steadiness that makes the filter useful. Leave the parameters at default and change the timeframe instead when you want a different speed.
When and where to use it
The Impulse System shines in trending markets, where long unbroken runs of green or red keep you on the right side and out of counter-trend trouble. It is happy across every liquid asset class — stocks, index futures, forex, and crypto — because its inputs are just price, not volume-dependent. In a tight, directionless range it becomes far less useful: colours alternate rapidly and the permission it grants keeps flipping, so you spend more time being whipsawed than protected. It is at its worst as a stand-alone entry engine; it was never designed to be one, and using it that way invites disappointment. Treat it as an overlay on a chart you are already analysing, not as the analysis itself.
Strategies that use it
The classic Elder application is a trend-following filter: define your trend and setup with your own tools, then only take longs on blue or green bars and only take shorts on blue or red bars, never fighting a solid colour. A second, more active tactic is the impulse-fade for exits — when a strong uptrend prints its first blue bar after a run of green, tighten your stop or bank partial profit, because momentum has just stopped confirming the trend. A third approach pairs it with pullbacks: in a market printing greens, wait for a two- or three-bar dip into a moving average, and enter long the moment the bar turns back to green, using the recent swing low as your stop. In every case the colour is the gatekeeper and something else is the trigger.
Combining it with other indicators
Because the Impulse System already blends trend (EMA) and momentum (MACD), the best partners add a dimension it lacks rather than repeating one it has. Support and resistance — horizontal levels, or Fibonacci retracements — tell you where to act while the colour tells you whether you may. Volume tools such as the Force Index, also an Elder creation, confirm whether the crowd is behind a colour change or whether the move is hollow. The Elder-Ray Bull and Bear Power histograms are natural companions, since they share the 13-EMA reference and expose the divergences the impulse colour alone hides. Avoid stacking it with another MACD-based or moving-average-crossover tool, because you would simply be reading the same lag twice.
Where it fails
The system inherits the lag of both its inputs, so the colour typically flips a bar or two after the actual turn — expect to give back a little at every reversal. In choppy, low-volatility conditions it produces a confetti of alternating colours that grants and revokes permission so fast it becomes noise. The most common beginner mistake is treating a fresh green bar as a buy signal; it is not, and chasing greens at the top of an extended run is a reliable way to buy exhaustion. Another trap is ignoring the higher timeframe — a green daily bar inside a red weekly downtrend is a weak long at best. Respect it as a two-factor veto and never ask it to do a job, pinpointing entries, that it was explicitly not built to do.
A worked example
Imagine a stock grinding higher for three weeks; its 13-EMA rises from 48.20 to 51.60 and the MACD histogram climbs steadily, so nearly every daily bar is green and your rule forbids all shorts. Price then stalls near 52.00: the EMA still ticks up to 51.90 but the histogram rolls over and falls versus the prior day, so the bar turns blue — momentum has stopped confirming even though the trend line still leans up. You take that blue bar as your cue to sell half your long into strength and lift your stop to 51.30 under the last swing. Two days later both the EMA and the histogram are falling together and the bar prints red, banning any new longs; the earlier blue bar had warned you the run was tiring while price was still near its high. Had you instead treated the long green run as a stream of buy signals, you would have added risk right into the top the blue bar was quietly flagging.