Technicals@ETMarkets: To measure trend & momentum in one shot, use 'Elder Impulse System'
The trend is deemed to be up and strong when both 13-day exponential moving average (EMA) and the MACD histogram move in the upward direction, say experts.
The ‘Elder Impulse System’ is built to identify the exact point where a trend speeds up or slows down. It is based on two indicators: a 13-day exponential moving average and the MACD histogram, which measures the distance between the MACD and its signal line.
As per theory, the moving average identifies the trend, while the MACD histogram measures momentum. The ‘Elder Impulse Trading System’ is colour-coded into the price bars on the chart for easy reference.
“The ‘Elder Impulse System’ is a unique combination that aims to measure both trends as well as momentum at one shot. This indicator adds a professional touch to the trader by helping him/her to make a cautious entry and exit at a fast pace just like a professional trader,” Mazhar Mohammad, Chief Strategist - Technical Research & Trading Advisory, Chartviewindia.in, told ETMarkets.com.
“The trend is deemed to be up and strong when both 13-day exponential moving average (EMA) and the MACD histogram move in the upward direction,” he said.
Similarly, the trend is deemed to be downward when both the 13-day EMA and the MACD histogram move downward.
When neither of the conditions is fulfilled, the trend is deemed to be neutral and sideways.
The indicator is displayed with the help of three colour-coded bars: green, red and blue. The green price bar shows that the bulls are in control of both trends as well as momentum. In other words, it means that both the 13-day EMA as well as MACD histogram are rising.
A red bar, on the other hand, indicates a bearish phase for the stock. It signifies that both the 13-day EMA as well as the MACD histogram are falling. A blue price bar indicates indecisiveness between the bulls and the bears.
When to enter & exit:
The most important question is how to decode this indicator and when should a trader enter or exit a stock based on the recommendation given by the ‘Elder Trading System’.
The idea behind the impulse system is to identify the exact point at which both the moving average and MACD align in one direction, which is upward, to indicate a buy signal. Likewise, a sell signal is generated when both the MACD and the ‘Elder Impulse System’ turn bearish.
For illustration, we have taken the daily chart of State Bank of India.
(Note: This illustration is for educational purpose and not a recommendation on a stock.)
“The impulse indicator should be used in conjunction with the market’s price action. The most important thing to note while using this indicator is that when it gives a buy signal, the primary trend should be an upmove,” Karthik Rangappa, VP, Educational Services, Zerodha, told ETMarkets.com.
“Likewise, when the indicator gives a sell signal, the primary trend should be a downtrend. Traders should avoid buying or selling in any other situation,” he said.
However, traders should avoid placing a trade wherein the impulse indicator suggests a buy signal but the market’s primary trend is bearish or vice versa.
This system can be used for all time frames but shall be subjected to a larger trend, which means if there is a buy signal on the daily charts, traders should initiate long positions only when the trend on the weekly charts shows an upward direction.