Fisher Transform Indicator Definition and How to use

The Fisher Transform Indicator created by John F. Ehlers. This technical indicator highlights when prices reach extreme levels, based on recent price movements. This may help in identifying turning points in the price of an asset. It also helps show the overall trend และ isolate price waves within a trend.

What is a technical indicator?

A technical indicator is a tool that traders use in technical analysis. It is dependent on key asset data, such as historical prices and trading volume. These help analyse short-term movements and are also useful for long-term traders in identifying entry and exit points.

There are thousands of technical indicators, which typically fall into two categories: overlays and oscillators. A few examples include the Fisher Transform Indicator, moving averages, the relative strength index, and the moving average convergence/divergence.

What is technical analysis?

Technical analysis is a discipline or กลยุทธ์การเทรด that uses past performance and data to find opportunities in the market. To forecast future price movements, traders look at implied volatility, trading volume, and asset prices. This data is used in calculations of various technical indicators, and then plotted on charts และ graphs to help traders in identifying optimal entry และ exit points.

Understanding the Fisher Transform Indicator

The Fisher Transform Indicator converts price to Gaussian normal distribution. It converts data, like market prices, that isn’t usually normally distributed.

Traders use this to identify potential trend reversals and turning points in financial markets. The Fisher Transform Indicator can be used by traders to better understand how asset prices and market conditions fluctuate.

How to apply the Fisher Transform Indicator to trading

The Fisher Transform Indicator is unbounded, allowing extremes to occur for extended periods. These extremes are based on an asset’s historical readings. For some assets, a high reading may reach seven or eight, while a low reading could be -4. These values may vary for other assets.

An extreme reading indicates the possibility of a reversal, which should be confirmed when the indicator changes direction. For example, if then turns downward after reaching an extremely high level, it suggests that the asset price (which may have already started falling) could fall further after a strong price rise in the asset.

The Fisher Transform Indicator often includes a signal line. This is a moving average (MA) of the indicator’s value, so it moves slightly slower than the Fisher Transform line. Traders may use the indicator as a trade signal when it crosses the trigger line. For example, when it drops below the signal line after reaching an extreme high, it can be a signal to sell a current long position.

As with many indicators, the Fisher Transform Indicator generates lots of trade signals—many of which may not be profitable. Some traders use the indicator alongside trend analysis. For example, during an uptrend, you can use it for buy and sell signals but not for short-sell signals. During a downtrend, you can use it for short-sell signals and for determining when to cover.

The Fisher Transform Indicator vs. Bollinger Bands

Bollinger Bands is a trend indicator, whereas the Fisher Transform is an oscillator. The two indicators look quite different on a chart, but both are based on a distribution of asset prices.

Bollinger Bands use a normal distribution, using standard deviation to indicate when the price may be overextended. In contrast, the Fisher Transform uses a Gaussian normal distribution.

While Bollinger Bands are overlayed over the price, the Fisher Transform appears as a separate below the price chart.

Despite these differences, the Fisher Transform and Bollinger Bands can be used together to enhance trading strategies.

Fisher Transform vs Stochastic

The two indicators have significant differences. The stochastic indicator is calculated by subtracting the lowest low from the current close and then subtracting the lowest low from the highest high. The Fisher transform calculates the mid-point of the price data by finding the highest high and the lowest low within a specified period. The price data is normalised by subtracting the midpoint from the current price.

However, the two indicators are used in a similar way.

1. Identifying overbought and oversold levels: Both indicators can help identify when an asset is overbought or oversold.

2. Following the trend: Both indicators generally rise when the price is rising and fall when the price is falling, making them useful for trend following.

3. Crossovers for signals: The crossover points can be used to generate buy and sell signals.

Limitations of the Fisher Transform Indicator

The Fisher Transform Indicator is a popular tool for technical analysts, but it has certain drawbacks.

Noise and inaccuracy

Though the indicator’s goal is to make turning points easier to identify, it can generate “noise” at times. Extreme readings are not always followed by a price reversal. The price may move sideways หรือ reverse only slightly.

Variability of extreme levels

What qualifies as extreme can be subjective, as the levels may vary over time. For instance, a level of four might be considered high for years, but eventually, readings of eight could become more common.

Timing and lag

Fisher Transform Indicator can be useful in identifying short-term changes in price direction. However, often lags behind actual price movements, leading to delayed signals. This delay can result in missed opportunities or late trade entries, reducing the effectiveness.

Normalisation of prices

Asset prices are not normally distributed, so attempts to normalise price data can result in flawed interpretations of the indicator’s signals and reduced reliability in forecasting price movements of the market.

The difference between the Fisher Transform Indicator and MACD

The Fisher Transform Indicator and moving average convergence/divergence (MACD) are different indicators used in technical analysis. Both tools provide traders with insights on trend signals.

The Fisher Transform Indicator normalises asset prices by transforming them while the MACD relies on moving averages and is often used in trading focusing on short-term trends. Many traders consider the Fisher Transform to be more accurate because it provides a clearer picture of how the market is moving.

In summary

Technical traders use indicators to find opportunities in the market. The Fisher Transform Indicator plays a vital role by converting prices into a Gaussian normal distribution, helping traders to spot trends and identify price waves within the trend.

Although the Fisher Transform Indicator is considered reliable, it should be used in conjunction with other indicators to provide a more accurate picture of the market and minimise potential losses.

IronFX education

Technical analysis can be complex, especially for new traders. IronFX offers a comprehensive library of free educational resources to help traders enhance their trading skills and abilities. These resources, available on IronFX’s website within its สถาบันการศึกษา, include courses, webinars, podcasts and articles on fundamental analysis and technical analysis, trading techniques, risk management techniques and the latest market trends.

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Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked in this communication.