A few years ago, the Fisher Transform indicator appeared in the public domain, becoming a popular technical analysis indicator for online forex trading. The Fisher Transform indicator transfigures price into a Gaussian normal distribution. The indicator is easy to use and interpret, often used to help traders identify potential overbought and oversold market conditions. The Fisher Transform indicator was created by John Ehlers and often used for reversal trading strategies.
When applied, the Fisher Transfrom appears similar to other indicators like the MACD and Stochastic Oscillator. The indicator has two lines that move up and down. One of the lines is known as Fisher while the other one is known as the Trigger. The other horizontal lines range between 1.5 and -1.5. Therefore, as with all similar indicators, traders watch closely areas where the two lines intersect.
What is the Fisher Transform indicator?
The indicator was developed by US-based electric engineer, John F. Ehlers. He based it on standard Gaussian distribution, which uses a bell curve to measure average numbers and follows distribution above and below a mean value. In the indicator, we have a mean value of 0 and the oscillator lines move up and below the value.
The Fisher Transform indicator is a fairly simple histogram oscillator. It is not based on standard methods and builds its calculations on max / min prices for previous periods on the basis of the relationship between extrema and the current price.
Depending on the direction, Fisher calculates for the previous time period the ratio of either highs (for a rising trend) or lows (for a falling trend) with the current price and, depending on this, recommends either buy or a sell trade.
Fisher Transform indicator installation and setup
The procedure is standard to attach the Fisher Transform indicator to your MetaTrader platform charts. You will first need to download the indicator as a single file with the *. ex4 (5) extension, which is then copied to … \ MetaTrader \ MQL4 (5) \ Indicators folder. After installation on the price chart, the indicator is located in an additional window. There are indicator versions for both the MT4 and MT5 platforms.
How to use the Fisher Transform indicator?
The signals from the Fisher Transform indicator are simple to use. We evaluate the direction of the trend by the color, blue meaning bullish and red meaning bearish. The strength of the trend is determined by the size of the column.
A red bar of the histogram appears we could look to open sell trades whereas a green histogram could signal buy trading opportunities. When changing colors from red to green (or vice versa), we may look to exit positions.
We may also be prepared to close the position if the size of the histogram column drops sharply – the current trend loses the strength. But you can really exit either after receiving confirmation from additional indicators, or according to your money management.
This is where the main problem of the Fisher Transform indicator arises in that it is redrawn – old bars are recounted when new ones arrive. These can lead to plenty of false signals generated. I have seen some modified versions of the indicator online that try to avoid this repainting issue but that can also take away from the purpose of what the indicator was actually designed to do.
Due to additional parameters, it is possible to reduce false signals, especially for small periods.
- RangePeriods – the number of bars to calculate (default is 55);
- PriceSmoothing – smoothing parameter;
- IndexSmoothing – some kind of index “smoothing”, used as an exception with the previous parameter;
- Left Right – shift in the calculation in the direction before (+) / back (-);
- Up_Down – shift of readings above / below the zero mark (almost imperceptibly in the work).
You can configure the signals to different settings to see which works best with your trading strategy.
Fisher Transform indicator trading strategy
The indicator has two lines that move up and down. One of the lines is known as Fisher while the other one is known as the Trigger. The other horizontal lines range between 1.5 and -1.5. Therefore, as with all similar indicators, traders watch closely areas where the two lines intersect.
A simple trading strategy is explained below:
Fisher Transform indicator buy setup
- If the histogram for the Fisher indicator turns blue for both 10 and 55 periods, then we can look to buy the asset.
- Stop-loss can be placed slightly below the local low.
- Take profit can be placed near the immediate resistance or if the indicator turns red.
Fisher Transform indicator sell setup
- If the histogram for the Fisher indicator turns red for both 10 and 55 periods, then we can look to sell the asset.
- Stop-loss can be placed slightly above the local high.
- Take profit can be placed near the immediate resistance or if the indicator turns blue.
Fisher Transform indicator conclusion
The ease of trading on the Fisher Transform indicator can be misleading due to the way that it can redraw itself on previous bars. This problem is embedded in the mathematics of the indicator itself, but this does not mean that it cannot be used at all. It is possible to simply analyze and accept the result of analysis only after the closing of at least 2 more of its bars following a signal from the indicator.
Fisher transform signals are not always accurate. If the signals are not on the extreme end and trending near the 0 value, it can provide false signals during crosses.All signals should certainly be confirmed with other forms of market analysis.
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