The Fisher Transform indicator found on Trading View shows the extremes of price action, which is based on recent prices. Using this indicator allows you to see the low and high points of a given index or security and may be used to help spot potential entry and exit points.
How to use the Fisher Transform Indicator
The Fisher Transform changes prices into Gaussian normal distribution, which allows you to see the peaks and troughs of the price movements. When the Fisher Transform gives a strong reading, this is sometimes a sign of a potential reversal. On the other hand, when the indicator turns down it’s likely that prices are going to follow suit. Because of these reasons, the Fisher Transform is considered to be a leading, and not a lagging, indicator.
So, how can you incorporate the Fisher Transform as part of your trading? The good news is that the indicator comes with its own signal line to help you make decisions. As a moving average of the Fisher Transform, the signal line gives off trade signals when it crosses above it. Conversely, a cross below can sometimes signal to sell off one’s position.
To summarize the usefulness of the Fisher Transform: it helps you visualize and identify short-term trends and also generates buy and sell signals. However, the responsiveness of the line should be tested first before relying on the signals with blind faith. You may notice that the indicator gives too few or untimely signals.
Another thing to keep in mind with the Fisher Transform is that prices are not typically distributed, which is why the indicator can sometimes be deceptive. Despite these issues, the ability to clearly see the peaks and troughs of a given index or security as well as to isolate short-term trends are invaluable tools for any trader.