Fisher Transform
period = 10 (5–30) • smoothing = 1 (1–5) Overview
The Fisher Transform, developed by John F. Ehlers, is a technical indicator that converts price data into a Gaussian normal distribution (bell-shaped curve), making it easier to identify potential turning points and trends in asset prices. By transforming prices using the natural logarithm function, the Fisher Transform amplifies price movements near the extremes, creating sharp, distinct peaks and troughs that make reversal signals unambiguous and relatively rare events.
The transformation process highlights when prices have moved to an extreme based on recent price history. The indicator consists of two lines: the Fisher line and the Trigger (signal) line. The calculation involves finding the midpoint of the price range, normalizing it to a -1 to +1 range, and then applying the Fisher transformation formula: y = 0.5 × ln((1+x)/(1-x)). The result is smoothed with exponential moving averages to reduce noise while maintaining the sharp reversal signals that make this indicator so effective for timing market turns.
Interpretation & Trading Signals
Primary Trading Signals:
- Line Crossovers: Fisher crossing above Trigger line = Buy signal
- Reversal Signal: When the two lines cross, it suggests a reversal
- Extreme Readings: Values beyond ±2.5 signal potential price reversal areas
- Direction Changes: Watch for Fisher line changing direction at extremes
Advanced Trading Strategies:
- Zero Line Crossing: Use to join existing trends - bullish above, bearish below
- Trend Analysis: In uptrends, use for buy signals only; in downtrends, for short signals
- RSI Combination: Combine with RSI for confirmation - both giving same signal
- Wave Isolation: Helps identify price waves within larger trends
Key Advantages & Limitations:
- Accuracy: Timely and accurate reversal signals due to Gaussian transformation
- Clarity: Sharp peaks make signals unambiguous and easy to identify
- False Signals: Can produce many signals, especially in sideways markets
- Best Practice: Use as part of comprehensive strategy, not in isolation
Example Usage
Code examples will be available once the Rust implementation is complete.
Performance Analysis
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