The Ehler Fisher Transform Indicator identifies market reversals by normalizing the prices over a specific period.

John F. Ehlers developed the Fisher Transform oscillator, which tells when the price has moved to an extreme. Therefore, you can locate key market reversals.

The indicator plots two lines that move up and down. One line is called the Fisher line, while the other is called the trigger line. It also draws horizontal lines which move between -1 and +1.

Like most oscillators, the Fisher Transform helps determine the overbought and oversold levels.

Formula

The formula for the Fisher Transform is

Fisher Transform = ½ * ln [(1 + X) / (1 – X)]

Where;

ln is the natural logarithm

X= change of price to a level between -1 and 1​

Calculations

To calculate the Fisher Transform, you need to follow certain steps.

1. Firstly, you need to find out the period. The default period Ehler set for the indicator was 9.
2. Secondly, you need to convert the prices of the period to values between -1 and +1. In this way, you can get the value of X.
3. After that, you must multiply the calculated values with the natural log.
4. Next, you need to multiply the values by ½.
5. It’s important to repeat the calculation as each period ends. This converts the recent price to a value between -1 and +1.
6. Also, it’s best to apply the default 9-period as the values may not fall between -1 and +1.

Best settings for the fisher transform indicator

The best settings for the indicator are

The length, by default, is set at 9. You can set the higher period, giving you a better chance of falling between -1 and +1.

The fisher line of the indicator comprises the Moving Average, while the trigger line is a signal line.

As with many oscillators, you should set the Fisher Transform on a higher timeframe. The indicator is prone to false signals on the lower timeframe.

How to trade with the Ehler Fisher Transform?

There are many ways to use the Fisher Transform, like locating trend direction and finding crossovers and divergences.

Locating the direction of the trend is straightforward with the Fisher indicator. The indicator two lines (fisher and trigger) move along with the price action.

When the Fisher Transform moves upwards, it suggests an uptrend, and here you can take long positions or exit short ones.

Conversely, when the indicator moves downwards, it signifies a bearish momentum, and you can go short or exit long positions.

You can also use the Fisher Transform for crossovers. The crossover of the lines indicates a possible change in direction. When the fisher line goes above the trigger line after reaching low, it suggests a possible uptrend.

On the other hand, when the fisher line goes below the trigger line, it’s a potential downtrend signal after reaching the high.

On the chart above, you can see that when the blue fisher line crosses above the orange trigger line after reaching low, we see an uptrend.

You can also find divergences with the Fisher Transform. If the price makes a new high/low and the indicator moves oppositely, it signifies a trend reversal.

Advantages

1. This indicator makes it easier to identify market trends and reversals.
2. Using the Fisher Transform is relatively easier than other indicators.
3. You can apply Fisher Transform as a secondary indicator in your strategies.

Ehler Fisher Transform vs Stochastics indicator

Both indicators look identical when you apply the Fisher Transform and Stochastics on the chart. Both are oscillators, have two lines, and help determine the overall market trends.

However, the Fisher Transform is unbounded, while the Stochastics oscillates between 0 and 100.

Also, there is a difference in calculation. The Stochastic %K and %D lines are calculated differently than Fisher Transforms’ fisher and tiger lines.

Summary

The Ehler Fisher Transform is an oscillator that helps determine key market reversals. The indicator plot two lines, which move along with the price action.

The horizontal dotted lines act as a range between -1 and +1. When the indicator goes above +1 and below -1, it suggests an extreme level, and that’s when the market reverses.

You can use the Fisher Transform and other indicators for further signal confirmation.