The Fisher Transform: John Ehlers

The Fisher Transform is a powerful trading indicator developed by John Ehlers. By transforming price data into a Gaussian probability distribution, it helps identify potential trend reversals and generate trading signals.



1/5/20242 min read

fisher transform
fisher transform

What is the fisher transform?

Imagine for a moment that you are trying to understand the pattern followed by a flock of birds in the sky. At first glance, their movements seem chaotic and without a defined pattern, but if we could find a way to simplify and organize this information, perhaps we could predict where they will head next.

The Fisher Transform does something similar, but in the world of finance. Instead of watching birds, it observes the prices of financial markets. Prices, like birds, can seem erratic and difficult to predict. However, what this tool, developed by the expert John Ehlers, does is transform these chaotic data into something much easier to analyze, using what we call a Gaussian distribution in statistics—a Gaussian bell.

This bell curve helps us view prices not as a series of random numbers, but as something that has an underlying order, where we can more clearly identify when a price is reaching a very high or very low point, which is unusual in its typical behavior. These moments, the high and low points, are like the extremes in the flight of our imaginary birds, indicating possible changes in market direction.

Practical Application

Now, how would we use this tool in practice? Let's say you are considering when to buy or sell stocks. By applying the Fisher Transform, you could see these extreme moments:

  1. When values are very high (+0.5 or more): The market might be too "bought," and we might expect prices to start falling soon.

  2. When values are very low (-0.5 or less): Indicates that the market might be too "sold," and prices might start to rise.

Just like a naturalist who knows when birds are likely to change direction, an investor can use this information to anticipate market changes and make more informed decisions. Of course, just like in nature, there is always uncertainty in the markets, so it is prudent to use this tool along with others, to confirm our hypotheses before acting.

Final Reflection

John Ehlers, with his background in electrical engineering, has given us a tool that transforms noise into clear signals, allowing us to understand a little better that seemingly unpredictable world of financial markets. It is a clear example of how principles from one discipline, such as engineering, can be successfully applied in others, such as financial economics, to reveal hidden patterns in data that would otherwise go unnoticed.

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