DEFINITION of 'Fisher Transform'

The Fisher Transform is a technical indicator created by J.F. Ehlers that transforms prices into a Gaussian normal distribution. Oftentimes, traders use the indicator to identify trend reversals since it tends to have much less of a lag time than comparable indicators.

BREAKING DOWN 'Fisher Transform'

Market prices do not have a Gaussian probability density function or the familiar bell-shaped curve of a normal distribution. The distribution of returns tends to be rather symmetrical about their means, but the tails are fatter than would be expected, since there are more outliers. This can make charts noisy and difficult to interpret for market technicians.

The Fisher Transform enables traders to create a nearly Gaussian probability density function by normalizing prices. In essence, the transformation makes peak swings relatively rare events and unambiguously identifies price reversals on a chart. The technical indicator is commonly used by traders looking for extremely timely signals rather than lagging indicators.

The Fisher Transform formula is calculated as: Y = 0.5 * ln ((1+x)/(1-x)).

The Fisher Transform can also be applied to other technical indicators, such as the Relative Strength Index (RSI) or Moving Average Convergence-Divergence (MACD).

Traders using the Fisher Transform may want to experiment with different time periods and upper and lower boundaries to signal trend reversals to determine what works best for a given security or situation.

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