Ehler’s Fisher Transform Indicator

The Fisher Transform, developed by John F. Ehlers, is a technical analysis indicator that converts price data into a Gaussian normal distribution. By transforming price movements, the Fisher Transform highlights potential turning points in the market, making it easier for traders to identify overbought and oversold conditions. The indicator aims to make market prices more predictable by emphasizing sharp price reversals.

Key Features of the Fisher Transform:

1. Signal Line and Histogram: The Fisher Transform often consists of two lines (the Fisher line and its signal line) or a histogram that indicates momentum. Crossovers between these lines generate buy or sell signals.

2. Overbought/Oversold Levels: The Fisher Transform’s values typically range between -2 and +2, where readings above +1.5 suggest overbought conditions, and readings below -1.5 indicate oversold conditions.

3. Reversals: The indicator is designed to spot potential price reversals with greater accuracy than traditional momentum indicators.

How to Calculate the Fisher Transform

The Fisher Transform applies a mathematical transformation to price data, typically using the high, low, and closing prices. The formula for the Fisher Transform is as follows:

1. Price Normalization: The indicator first normalizes price changes to create a more Gaussian distribution.

2. Fisher Transform Calculation: This transformation is then applied to produce values that highlight sharp turning points in the market.

The specifics of the calculation involve using a series of smoothing and transformation steps, which make sudden price movements more pronounced.

Analyzing the Fisher Transform Indicator

To analyze the Fisher Transform, follow these steps:

1. Load the Chart for the Asset:

   • Open the charting platform.
   • Load the chart for the specific asset you wish to analyze.

2. Set the Timeframe:

   • Choose an appropriate timeframe based on your trading strategy. The Fisher Transform can be used on various timeframes, from intraday to daily or weekly charts.

3. Add the Fisher Transform Indicator to the Chart:

   • Navigate to the Indicators section.
   • Search for Fisher Transform in the list of available indicators.
   • Click on the Fisher Transform indicator to add it to your chart. It will appear as a line or histogram below the main price chart.

   

4. Interpret the Fisher Transform Signals:

   • Buy Signal: A buy signal is generated when the Fisher Transform line crosses above the signal line, indicating that the market momentum is turning bullish.
   • Sell Signal: A sell signal occurs when the Fisher Transform line crosses below the signal line, suggesting bearish momentum.
   • Overbought Condition: When the Fisher Transform reaches extreme positive values (typically above +1.5 or +2), it signals overbought conditions and a possible price reversal.
   • Oversold Condition: When the Fisher Transform falls to extreme negative values (below -1.5 or -2), it indicates oversold conditions, signaling a potential price rebound.