Fisher Transform Indicator
Candlefocus EditorThe underlying formula of the Fisher Transform is rather complex and requires knowledge of the mathematics of Fourier Series, Power Series, and Sine Integrals. On a technical analysis chart, it is displayed as a fluctuating line with a range that oscillates between -1 and 1. The line will make several “turns” throughout a given period. According to Ehlers, these turns can identify potential turning points in price.
Technical traders primarily use the Fisher Transform to identify overbought and oversold conditions in the market. When the Fisher line reaches an extreme level on the -1 to 1 scale traders will look for a potential reversal. They might also look for divergences between price and the Fisher line as a sign of a potential reversal.
The Fisher Transform can also be applied to indicators other than asset prices. According to Ehlers this can be used to reduce the lag in a given indicator. Applying the Fisher Transform to potentially laggy indicators like moving averages can help detect turning points in the market much quicker.
When used correctly, the Fisher Transform can help technical traders identify potential turning points and market reversals. It’s important to remember, however, that it’s a normalizing indicator so it should always be used in conjunction with other technical tools to get a complete picture of the market. Applying the indicator to other indicators can reduce lag and provide better signals, but it should never be used in isolation.