What is 'Fisher Transform'

The Fisher Transform is a technical indicator created by J.F. Ehlers that converts prices into a Gaussian normal distribution. This indicator has gained popularity in recent years because it tends to generate earlier buy and sell signals than other leading 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 around their means, but the tails are fatter than expected because 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 leading signals rather than lagging indicators. The buy and sell signals are generated by crossovers at indicator extremes, similar to the Stochastic oscillator. The Fisher Transform can also be applied to other technical indicators, such as the Relative Strength Index (RSI) or Moving Average Convergence-Divergence (MACD).

The Fisher Transform formula is calculated as:

Y = 0.5 * ln ((1+X)/(1-X)).

 

Where:

"ln" denotes the abbreviated form of the natural logarithm.

"X" denotes the transformation of price to a level between -1 and 1 for ease of calculation

Fisher Transform Example

 

 

 

This example utilizes a 9-period Fisher Transform to locate Apple buy (green) and sell (red) signals between January and May 2018. The three buy signals during the period coincided with bullish reversals that lasted for about two weeks, offering plenty of profit potential. The three sell signals during the period generated less reliable outcomes, with the first and third crossovers flagging profitable declines. However, the March 1st signal coincided with a single down day, followed by a shallow but multiday uptrend that reached a new high even though the indicator continued to fall.  

Traders using the Fisher Transform may want to experiment with different time periods and upper and lower boundaries to determine what works best for a given security or situation. Generally speaking, shorter time periods will generate a greater number of false signals, making trade decisions more difficult. Conversely, settings that are too long will miss important market turns, reducing potential profits. Fisher Transform settings often work best when tailored to specific instruments, after reviewing the long-term history of signals at different settings.   

RELATED TERMS
  1. Signal Line

    Signal lines are used in technical indicators, especially oscillators, ...
  2. Fisher Effect

    The Fisher effect is an economic theory created by Irving Fisher ...
  3. Buy Signal

    A buy signal is an event or condition that alerts a person to ...
  4. Fisher's Separation Theorem

    The Fisher's separation theorem is a theory that holds that a ...
  5. Sell Signal

    A sell signal is a condition or measurable level at which an ...
  6. Fisher College of Business

    The Max M. Fisher College of Business is the school of business ...
Related Articles
  1. Small Business

    Ken Fisher's Success Story: Net Worth, Education & Top Quotes

    Learn about the rise of Kenneth Fisher, the would-be forester who became the founder of one of the largest money management firms in the country.
  2. Investing

    Where Is Ken Fisher Spending His Billions- and Why?

    Fisher's fund has considerably outperformed the average hedge fund for the whole of 2016 and part of 2015.
  3. Investing

    The Top 5 Positions in Ken Fisher's Portfolio (AMZN, LQD)

    Pay attention to whether Amazon.com, Inc. remains the top holding of Fisher Asset Management despite a 27% share price drop during the first five weeks of 2016.
  4. Financial Advisor

    Fisher Investments: Investment Manager Highlight

    Take a close look at Fisher Investments, a giant among money management firms.
  5. Trading

    Spotting Breakouts As Easy As ACD

    Wondering what it means to be a "logical trader"? Take a look at this system devised by Mark Fisher.
  6. Investing

    Understanding the Fisher Effect

    The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate.
  7. Trading

    Trend Trading: The 4 Most Common Indicators

    Learn about the top indicators and tools trend traders use to establish when trends exist and find entry and exit points.
  8. Trading

    4 Stocks With Bullish MACD Crossovers

    These four stocks recently created a bullish MACD crossover, signaling the potential end of the pullback and the start of the next up-trending wave.
  9. Trading

    Measuring Stock Market Sentiment With Extreme Indicators

    Pay attention to how the exhaustion principle helps technical indicators signal trend reversals when abrupt value changes coincide with high trading volume.
RELATED FAQS
  1. What is Fisher's separation theorem?

    Named after American economist Irving Fisher, it stipulates that the goal of any firm is to increase its value to the fullest ... Read Answer >>
  2. What are the best technical indicators to complement the Stochastic Oscillator?

    Explore the function of the stochastic oscillator indicator, and discover other technical indicators traders use to complement ... Read Answer >>
  3. How do I start using technical analysis?

    Technical analysis is a method of analyzing securities by evaluating current and historical price and/or volume activity. ... Read Answer >>
  4. What Technical Indicators Best Complement RSI?

    Learn some of the best momentum technical indicators that can be used along with the relative strength index to anticipate ... Read Answer >>
  5. Is a Slow Stochastic Effective in Day Trading?

    The good news is that most technical indicators can be adjusted to be of value to a day trader. Read Answer >>
  6. What are the best technical indicators to complement the Moving Average Convergence ...

    Learn the best technical indicators to use as part of a trading strategy in conjunction with the moving average convergence ... Read Answer >>
Trading Center