What is Fisher Transform: Identify Extreme Price Surges in Bitcoin (BTC)

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Summary

  • Fisher Transform is a leading indicator that shows trend extremes in the price of Bitcoin and altcoins.
  • There are two lines in the indicator: “Fisher” and “Trigger”. The Fisher line is marked in blue and the Trigger line is marked in orange.
  • The indicator oscillates between -5 up to +5 and the mean value is 0. It can quickly go up and down on the chart as it focuses on short-term data.
  • The Fisher Transform divergence is a cross between these two lines on the indicator. When there’s a cross between the Fisher and Trigger lines, we can expect a price reversal in the opposite direction.
  • There are two types of indicators: Leading and lagging. Leading indicators show trends in real time and lagging indicators show trends after they’re confirmed.
  • Fisher Transform is a leading indicator and the data provided is in real-time. This helps traders who don’t want to wait for trends to place trades immediately.
  • There are certain limitations for the indicator – it can get noisy and provide false signals. It’s best used in combination with popular indicators such as the Relative Strength Index (RSI).
  • The Fisher Transform indicator by Ehlers is available on all Phemex crypto pairs under the spot markets and futures markets.

Fisher Transform

What Is The Fisher Transform Indicator?

The Fisher Transform is an indicator that displays turning prices in Bitcoin and altcoins. The indicator was developed to identify extreme price changes and displays readouts with two lines: the Fisher and Trigger line. The readings start from a baseline of 0 and can fluctuate upwards of 5 and downwards below -5.

The extremes on the indicator can last for a long time until there’s a reversal in the trend direction. The reversal is identified when the two lines intersect and cross. For example, if Bitcoin experiences a price surge the two indicator lines would go up and if the price reverses they would intersect and go down.

Traders can place long trades on Bitcoin when the two Fisher-Trigger lines intersect at the bottom and the line reverses to the upside. Conversely, they can place short trades when the price is up and the two lines intersect, expecting the price to go down.

As an unbounded indicator, the extremes will continue until there’s a trend reversal. The Fisher Transform value changes often and the data is synced in real-time. Traders who want signals as the price action is unfolding without trend confirmation can use the indicator for short-term swing trading. It can also be used for long-term trading combined with lagging indicators.

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. This is why the indicator is best used for extremes in the Bitcoin price when it peaks near the 5 value. If we have a high readout, we can expect a strong reversal or the continuation of an uptrend.

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How to Read The Fisher Transform?

The Fisher Transform indicator is an indicator that allows us to discover peak surges in the price of Bitcoin (BTC) and altcoins. The indicator has two lines: The first line is the ‘Fisher’ and the second line is the ‘Trigger’. The lines oscillate between a range of -5 up to 5 and each indicates a move to the downside or the upside.

Fisher Transform is a leading trend indicator that can show us the direction of a crypto in real-time. The Fisher Transform moves much faster and gives us data as the trends are developing, allowing us to place a trade accordingly. Other trend indicators such as Zig Zag are lagging and we have to wait until trends are confirmed.

If there’s a trend-reversal, the two Fisher-Trigger lines intersect on the chart. The speed and extreme movement of the oscillator mean it’s limited in some extent; hence it should be combined with other indicators such as the Relative Strength Index (RSI), Stochastic Oscillator (StochRSI), and Moving Average Convergence Divergence (MACD). These indicators can help traders filter noise.

Who Invented The Fisher Transform?

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.

What Is The Fisher Transform Indicator Formula?

The Fisher Transform uses Gaussian distribution which is normal distribution over averages in price. The Fisher Transform formula is not to be confused with the Fisher Z transformation (a mathematical formula not used for trading) or the Fisher Index which is a consumer-price index. The following is the Fisher Transform formula used for trading:

Fisher Transform formula

The X signals the “transformation” of the current Bitcoin price around +1 and -1. The default “ln” calculation is over 9 periods. This means if we use it on the daily chart, we’re going to get calculations for the last 9 days and if we use it on the weekly chart it will calculate for the last 9 weeks.

Traders can optionally adjust the period length to any setting. They can also change the line colors on Phemex to make them readable with other indicators.

How to Use The Fisher Transform Indicator?

Let’s use Phemex platform for this demonstration. The Fisher Transform is available for all 50+ spot market and futures contracts on Phemex. To get started, select a popular pair such as BTC/USDT:

Bitcoin chart and indicators on Phemex

BTC/USDT is the most traded pair on Phemex.

Adjust the length to “D” (daily) at the top-left for optimal results and press on “Indicators” at the top to locate the indicator. Search for “Fisher Transform”:

Search for Fisher Transform

Search for Fisher Transform among hundreds of different indicators to trade.

Left-click on the indicator and you will get Fisher Transform results for Bitcoin’s daily price:

Fisher Transform on Bitcoin chart

The Fisher graph activated on the Bitcoin chart.

The current Fisher Transform value is “3.2” which indicates that Bitcoin was reaching an extreme price on the upper end. If we want to check the accuracy of the indicator we can zoom in and analyze when the two Fisher-Trigger lines last crossed and compare that to the current price:

changes indicated by Fisher-Trigger line

The candles reflect changes after Fisher-Trigger line crosses.

The last time the two lines crossed, Bitcoin was bullish and then we got a bearish divergence to the downside. The price immediately went down after the Fisher and Trigger lines crossed, confirming the accuracy of the indicator. Historically, we can see that once the lines crossed, there was a breakdown in price or a reversal to the upside.

The default period length is set to 9 periods as we can see under “Fisher 9” below. We can hover over that part and press on “Settings” if we want to adjust the length and color lines:

Fisher Transform settings

Adjust the colors of the Fisher/Trigger lines or the levels.

The Fisher line is marked in blue and the Trigger line is marked in orange. There are also five price levels marked in lines and we can adjust the extensions and the colors optionally.

Fisher RSI

If we want to make a Fisher RSI combination, the RSI indicator can be loaded simultaneously:

RSI and Fisher Trigger

The RSI and Fisher Trigger indicators working simultaneously.

The RSI indicator is a trend indicator that can tell us if Bitcoin is overbought or oversold. If it’s overbought, this means that traders are buying and the price will go up. It also means we can expect a pullback to the downside.

The two indicators provided similar readouts during the last Bitcoin breakdown.  At the time of writing, Bitcoin is going down and both indicators show a bearish divergence. The main difference is that Fisher Transform tends to cling to extremes and the lines are more consistent, while the RSI indicator oscillates more.

What Are The Downsides Of Fisher Transform?

The Fisher Transform indicator should not be used as a sole trading indicator as it can generate false signals. We recommend combining it with other indicators such as MACD and RSI to reaffirm the accuracy of the reversals. While it’s quite accurate for detecting reversals, the indicator is not reliable unless the line is trending towards the upper or lower extreme ends.

If we’re using the Fisher Transform during sideways markets when there are 1%< daily price fluctuations, we can get mixed signals and even the cross wouldn’t be reliable. A trader has to be very careful using this indicator in choppy markets.

Even when the price is trending on the extreme upper end, the price could only reverse a small amount and then reverse on the trend line. Using the example above, there’s no guarantee the price won’t reverse to the upside again. The tool is best used for short-term trading and not as a long-term trade indicator.

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Conclusion

Bitcoin’s history has shown us that it can double in price or collapse within weeks – this is extreme price action. During a Bitcoin bull run, the price might be headed in one direction for weeks or months at a time. The Fisher Transform indicator can confirm this is happening by normalizing prices and visualizing the extremities of the price action.

The main advantage of the indicator is that we have two lines: The ‘Fisher’ and the ‘Trigger’. Once these cross, there’s usually a trend reversal and this gives confirmation that we’re about to see a breakdown in price or a reversal to the upside.

Traders should be careful when they use the Fisher Trigger indicator in sideways markets as it can generate false signals/noise, but it can also provide powerful confirmation signals in conjunction with other indicators such as the RSI indicator.


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