How to Trade the S&P500 Using The Impulse Indicator

Impluse Indicator on the S&P 500

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In this article I look at whether the Impulse Indicator is a good tool for trading the S&P 500 index. In my analysis I got some surprising results and I decided to share them here.



The Impulse Indicator

One of my all time classic trading books is Come Into My Trading Room by Dr. Alexander Elder. In this book Dr. Elder describes the reason he developed the Impulse System:

“High volatility during the bull market of the 1990s made momentum trading very popular. The idea is to jump aboard a fast-moving stock as it begins to run and hop off after it slows down.”

Momentum trading is still a popular way to trade the markets for many people. The most important factor in doing this successfully is finding the right market and timeframe. In this article I look at whether a system designed for fast moving markets can be used in a relatively slow moving index.

The S&P 500

S&P500 Chart 1996-2006The S&P 500 index tracks the price movement of 500 of the largest US listed stocks. Looking at the monthly chart to the left shows that prices have tended to trend either upwards or downwards throughout the last 20 years.

The Impulse Indicator is designed to take advantage of fast moving markets. I wanted to know whether this index is moving fast enough and strong enough to trade with the Impulse Indicator.

Testing the Impulse Indicator

I tested the Impulse Indicator using a Tradinformed Backtest Spreadsheet. They are built using Excel and are a great way for anyone to test their own trading strategies.

For this test I used 20 years worth of S&P 500 historical data between 1996 and 2016. I tested the strategy on the daily timeframe.

Trading Rules

The trading rules are very simple. I did not use any stops or profit targets.

  • Enter Long Trade when the Impulse Indicator is Positive and the previous period was Neutral
  • Exit Long Trade when the Impulse Indicator is Neutral
  • Enter Short Trade when the Impulse Indicator is Negative and the previous period was Neutral
  • Exit Short Trade when the Impulse Indicator is Neutral

Results

Impulse Indicator Capital Growth

Gross Winning Trades $220,399
Gross Losing Trades $-301,950
Net Profit $-81,551
Profit Factor0.73
Winning Trades293
Losing Trades510
Win Percentage36%
Largest Winning Trade $4,871
Largest Losing Trade $-5,925
Max Drawdown85%
Expectancy-102

Reversing the Impulse Indicator

The above results and capital graph show how the Impulse Indicator does not work well with the S&P 500 in most market conditions over the past 20 years. However, this leads straight to the obvious question: can we reverse the strategy and make it profitable?

In this new test I reversed the Impulse Indicator so that we now enter a Long Trade when the Impulse is Negative. And enter a Short Trade when the Impulse is Positive.

Revised Results

Impulse Indicator Capital Growth 2

Gross Winning Trades $932,395
Gross Losing Trades $-581,473
Net Profit $350,922
Profit Factor1.60
Winning Trades510
Losing Trades293
Win Percentage64%
Largest Winning Trade $32,100
Largest Losing Trade $-21,325
Max Drawdown20%
Expectancy 437

Conclusions

The difference between the results of the two strategies is striking. We can certainly conclude that it is much better to trade the S&P 500 using the reverse Impulse System over this time period. The system has a handy 64% winning trades and is consistently profitable during most of this time period.

If we think about these results they are not that surprising. Dr. Elder developed the Impulse system for fast moving stocks in fast moving markets. An index of 500 stocks takes a lot to move and so is less suited to pure momentum strategies (at least on the daily timeframe).

Video

I have recorded a YouTube video of me describing the Impulse trading strategies. If you would like to watch me describe the strategy you can see the video here:

Further Resources

If you are interested in different trading strategies check out my page: Trading Strategies. If you are interested in technical indicators I have a page with lots of examples here: Technical Indicators.