The Impulse System

The Impulse System

This system has been covered in a number of books by Dr Alexander Elder.

From the book “Entries and Exits, Visit To Sixteen Trading Rooms”, it seems that this system is used as a censorship system rather than an automatic trading system.

This system uses the slope of the moving average and MACD histogram to classify the system trends. There are 4 types of markets:

Type	Slope of EMA	Slope of MACD Histogram	Trading Message
1	Up	Up	Long or stand aside, no shorting
2	Down	Down	Short or stand aside, no buying
3	Up	Down	Either long or short
4	Down	Up	Either long or short

When the slope of EMA is up, it shows that inertia favors the bulls. The reverse is true for the bears. When the slope of EMA is down, bears have the upper hand.

The slope of the MACD histogram shows the power of the bulls and bears. When slope of MACD histogram is up, the bulls are gaining strength. When slope of MACD histogram is down, the bears are growing stronger.

Let’s do a case study to see whether the method works.

I have chosen FXI and STI respectively. FXI is iShares FTSE/Xinhua China 25 Index and STI is the Straits Times Index.

The rules are as follows:

Entry

1. Slope of weekly EMA is up. 26 week EMA is used
2. Slope of weekly MACD Histogram is up. 12-26-9 weekly MACD Histogram is used.
3. When both conditions 1 and 2 wait for conditions 4 and 5 to be satisfied
4. Slope of daily EMA is up. 13 day EMA is used
5. Slope of daily MACD Histogram is up. 12-26-9 daily MACD Histogram is used.

Exit

1. Slope of weekly EMA is down. 26 week EMA is used
2. Slope of weekly MACD Histogram is down. 12-26-9 weekly MACD Histogram is used.

Simulation data is from 2003 to 20 Mar 2008

The trading record for STI is as follows:

Entry Date	Entry Price	Exit Date	Exit Price	Change (%)	Draw Down %	Max Gain %	Bars Held
1/5/2004	1,797.75	5/17/2004	1,745.89	-2.88	-2.8847	6.4069	91
6/28/2004	1,807.15	10/24/2005	2,249.57	24.48	-0.2047	32.792	337
11/7/2005	2,268.76	5/29/2006	2,449.61	7.97	-1.5828	17.5237	139
8/18/2006	2,477.94	8/13/2007	3,375.02	36.2	-2.0537	48.8567	246
8/27/2007	3,426.19	11/19/2007	3,454.70	0.83	-5.1436	14.0089	59
12/3/2007	3,549.47	12/17/2007	3,417.08	-3.73	-3.7298	2.0389	10

The trading record for FXI:

Entry Date	Entry Price	Exit Date	Exit Price	Change (%)	Draw Down %	Max Gain %	Bars Held
6/13/2005	53.767	10/17/2005	58.08	8.02	-0.5933	18.7476	88
11/14/2005	57.819	6/12/2006	69.242	19.76	-0.7939	43.4096	143
7/3/2006	76.714	3/5/2007	89.305	16.41	-5.8268	52.0596	167
3/26/2007	102.393	1/7/2008	167.37	63.46	-3.0881	111.9071	198

This method is able to avoid trading in the market when the trend is in sideways mode. The average gain is higher than the average loss which is typical for trend trading method.