How To use Fisher Transform To Identify Reversals and Increate Profit Potential

Fisher Transform is one of the best indicators for binary options. It is quite useful when trading stocks too. Fisher Transform is basically an oscillator based on complex mathematical theories and can transform share prices following any probability distribution function into Gaussian normal distribution.

Interestingly, Fisher Transform indicator can be applied to prices as well as other indicators. Fisher Transform is mainly used to identify potential price reversals. Let’s explore more on this indicator.

What is Fisher Transform Indicator?

Created by John .F. Ehlers, Fisher Transform is designed to identify major price reversals. This leading indicator transforms prices into sine wave that seeks to pinpoint extremes in the market.

The oscillator moves above and below a zero line and has clear and sharp turning points. This simplifies the identification of trend reversals.

The indicator consists of two lines. They are the Fisher transform line and the signal line. This is quite similar to the stochastic oscillator’s fast and slow lines, and the crossover of these lines generate entry signals. The figure below shows the Fisher Transform indicator.

Fisher Transform and Uptrend/ Downtrend

  • When the value of Fisher Transform is near 0, it is said to be neutral.
  • When the value is above 0, it indicates an upward movement
  • When the value is below 0, it indicates a downward movement.

Note that there is no set limit to the value it can go off the 0.

Fisher Transform and Divergences

Whenever there is a divergence between Fisher Transform and price, it usually indicates that the prevailing trend would reverse.

  • Bullish Divergence – This is a buy signal buy. It happens when the price forms a lower low and the corresponding Fisher Transform value is higher low.
  • Bearish Divergence – This is a sell signal. It happens when the price forms a higher high and the corresponding Fisher Transform value is a lower high.

In addition to divergences, Fisher Transform indicator can be used for long term peak analysis for trend as well as for support/resistance.

How Traders Use Fisher Transform For Making Better Trades?

Traders use Fisher Transforms for identifying possible bullish and bearish signals, thanks to their sharp and distinct turning points.

Bullish Signals

  • When the Fisher transform line moves above the signal line, traders go long.
  • When there is a bullish divergence between Fisher transform indicator and price, traders go long.
  • When the fisher line turns up below -1 threshold and crosses above the signal line, traders go long.

Bearish Signals

  • When the Fisher transform line moves below the signal line, traders go short.
  • When there is a bearish divergence between Fisher transform indicator and price, traders go short.
  • When the fisher line turns down above the 1 threshold and crosses below the signal line, traders go short

The figure below shows how traders use Fisher Transforms for buying and selling.

Note that the Fisher Transform should be used in tandem with other indicators and analytical methods for better accuracy of the trades.

Happy Trading!

Tara

He’s the richest man in the world. He has 47 million Twitter followers. And his genius is on par with Einstein, Jobs, and Nikola Tesla himself. Best of all, he can make investors millions with a single tweet. In fact, a new “big tweet” could come any day now. Full story here.