Fisher Transform indicator

  • June 11, 2021
  • Posted by: CoachShane
  • Category: Trading Article

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The Fisher Transform indicator was created by John F. Ehlers and is not a highly popular trading indicator.

When applied to your chart, it looks much like the standard Stochastics Oscillator and the MACD indicator. It has two lines, the trigger and the Fisher line, as well as 5 horizontal lines:

  • 1.5
  • .75
  • 0
  • -.75
  • -1.5

There are numbers that are higher and lower than the ones with the horizontal lines.

The indicator shows when prices have reached an extreme where many traders look for potential price reversals. It is possible that this can help in spotting turning points in the price of an asset.

FISHER INDICATOR
FISHER INDICATOR

Keep in mind that the Fisher Transform is an unbounded indicator which means both the trigger and the Fisher line can move well past the horizontal line levels.

Extreme readings on the indicator are often used to show overbought (sell signal) and oversold (buy signal) market conditions. What’s extreme? That’s a good question because being unbounded means there is no limit of how high or low it may go. There are no maximum values on either side of the zero line.

In short, the indicator seeks to present turning points in the market although at times, the indicator will look noisy which defeats that purpose.

I will add that the Fisher seeks to normalize price movements however there is little evidence of a normal distribution of price in the markets.

Outliers are a real threat when dealing with the financial markets.

But, that’s the intention of it so the next step is deciding on how to use it.

The fact is that all indicators will have flaws but that does not make them useless.

There are quite a few uses of this indicator:

Let’s take a look at divergence.

Quick refresher: Divergence is when price is going one way but the indicator is going the opposite.

divergence fisher indicator
divergence fisher indicator

This is the daily stock chart of INO and price gaps to new lows.

At the bottom we see price gap down but then close back stronger that the open. The Fisher Transform is showing that the distribution, compared to the recent past, is not supporting this move.

Price breaks a trendline (my rules must have the last swing into lows connected) and heads higher.

One thing to note is that this stock, according to the indicator, was making extreme moves to the downside as it broke the -2.0 fairly often. So this particular move, when compared to the recent past, was not an overly extreme move. It fit that past quite nicely.

Looking at another chart….

bearish divergence with fisher transform
bearish divergence with fisher transform

Pretty obvious that the Fisher was not supporting the new highs.

You would then use your tactics to find an entry that triggers you into a short trade. There are different ones you can use:

This is not a complete trading strategy tutorial but is giving you insight into an indicator you may find useful.

Remembering this is an unbounded indicator, extreme moves are going to be subjective.

What we can do is compare the indicator now to the state in the recent past to give us a definition of extreme.

extreme price moves
extreme price moves

This is an hourly stock chart and price has had a good run down after putting in several bearish divergences at highs giving us a trend reversal.

At the lows, price has run into previous support and compared to the recent history of the Fisher, has put in an extreme move.

Price at support + extreme move + no downside follow through = potentially higher market prices.

Another example using Bitcoin….

bitcoin
bitcoin

The indicator put in an extreme at the highs and then began to put in divergence. Pretty strong indicator signal of upcoming lower prices.

We also have the indicator put in a double bottom on the right. Not an extreme move that we would be looking to take action with.

Traders love to use indicators and the only one I would consider using would be a moving average.

Using a longer term average such as the 50 SMA, will give us trend direction and then we can use the Fisher for the conditions we’ve just covered.

However, the more indicators, the more removed you are from price.

Using simple trend structure of higher highs lows and the reverse, is almost all you need for trend.

Once price action is not showing that pattern, consider price to be in a trading range.

To me, it’s just another indicator and the premise behind it may not be as valid as some may think. Normalizing the distribution of prices using a Gaussian distribution in the financial markets may have zero meaning. From gaps to outliers, it’s not as clear cut as people may think.

If you are a fan of divergence and looking for market extremes, the Fisher Transform indicator may still be something to consider. Just understand that a complex calculation does not mean it’s better than any other indicator out there.

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Author: CoachShane

Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

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Active day and swing trader focusing on futures, options and momentum stocks.