Inverse Fisher Stochastic Indicator - Cryptogracia (2022)

Here’s a quick review of John Ehlers’ inverse fisher transform.

You’re right about attributing this trading theorem or whatever you choose to call it to this Engineer.

Is it worth the time you’ll spend learning it?

Definitely!

It enables you see the market in one more light.

And that could improve the way you trade significantly.

Therefore, sit back and give this concept great thought.

I’ll try as much as I can to use simple English to describe the inverse fisher transform.

And its application to the Relative Strength Index, Stochastic, as with other oscillating indicators.

Because it can get a bit tacky at some point.

Let’s get right into the Inverse fisher stochastic.

What is Stochastic?

Stochastic is a trading indicator that hints at trend reversals.

You can easily enable it on trading apps like TradingView, TabTrader, Binance, etc.

Now, this indicator shows you overbought and oversold regions.

I’ll explain.

Overbought simply means price is trading higher than it should within that session or timeframe.

So let’s say Bitcoin was trading between $29,400 and $29,800 on the 5 minutes timeframe.

All of a sudden it rallies to $30,000 and even trades as high as $32,000.

What would you say has happened?

Bitcoin is overpriced at that moment since its range on that timeframe is exceptionally high.

If you understand this concept for overbought, then compare it to oversold or undersold pairs.

Price is trading significantly lower than it had in certain timeframes.

Read Also: Weekly Pivot Points for Swing Trading Cryptos

As I’d earlier mentioned, stochastics indicator shows you these overpriced and underpriced levels.

The stochastic’s oscillator ranges between 80 and 100 showing overbought prices.

It oscillates below 20 to indicate undersold prices.

It’s worth mentioning the RSI as well since it is majorly used in this theorem.

The RSI’s range around 70 hints overbought and below 30 is undersold.

Now that you understand this concept, let’s check the inverse theorem concept is about.

Overview of the Inverse Fisher Transform Concept

Ehlers’ remarks that indicators do help us time our entries and exits in the market.

Yet we often times don’t take their signals confidently.

Why’s that?

It could be because we’re uncertain if the indicator is right.

But what happens if the indicator is actually right and you’re the one misreading its signals?

You’d take the trade in the wrong direction and probably blame the indicator for false signals.

That could get worse if you’re new to trading. Or have little or no knowledge on candlesticks and generally price action trading.

So, Ehlers has proferred a solution that could go a long way to give your stochastic indicator a greater reading accuracy.

Let’s find out what that is.

Theorem’s Focus

Ehlers’ focus is on timely and clear signals from indicators.

Because these two could be everything.

You need to read the actual signal the indicator gives and on time.

Misreading it could just be as bad as false signals.

And finally realizing it’s time to buy or sell after the market has advanced or declined from a good entry isn’t ideal.

That’s to say losses could be due to the trader as a result of not really understanding what the indicator says.

I’ve been going on about indicators but this concept specifically focuses on indicators that oscilate.

What are these?

There’s the Relative Strenghth Index (RSI), Moving Average Convergence Divergence (MACD), and the stochastic.

What is Inverse Fisher Transform?

An inverse fisher transform is a formula used to modify the probability distribution function (PDF) of indicators.

Probability distribution is a function that shows the likelihood for certain results to occur during an experiment.

Accordingly, Inverse fisher transform is applied to prices’ and indicators’ probability distribution function.

Ehlers applied the inverse fisher transform to the PDF of RSI.

According to the writer, the same can be done for oscillating indicators.

All of this is made possible using an inverse fisher transform formula.

This formula is:

Inverse Fisher Stochastic Indicator - Cryptogracia (1)

Check this online document for more clarity on the Inverse Fisher Theorem and even its relation to Gaussian normal distribution.

How the Inverse Fisher Transform is Created

Here’s a summary of what you’ll find in this concept.

  • There is a transfer response of the inverse fisher.
  • An input around –0.5 and +0.5 yields an output that is similar to the input.
  • Input values above 2 result in compressed outputs.
  • Inverse Fisher Transform produces a result that could be +1 or –1.

And this result helps to create indicators that give clear signals.

An RSI of price is taken before a stochastic of the RSI is done.

The latter gives the new indicator a ranging value between 0 and 100.

This range can be equated to -1 and +1 values.

The writer recommends using the probability PDF to make your Stochastic perform better.

This differs from the regular way of only modifying the values of the indicator.

The latter is often in a bid to make it faster or slower.

How to Trade the Inverse Fisher Transform Stochastic Oscillator

The inverse fisher transform was applied to the RSI indicator to create a new indicator.

The indicator is divided into three parts.

One part is above +0.5, the second is between +0.5 and -0.5 and the last is below -0.5.

Here’s how to use the Inverse transform indicator.:

  • Long when oscillator goes above -0.5
  • Long when oscillator goes above +0.5
  • Short when oscillator goes below +0.5
  • Short when oscillator goes below -0.5

1. Long When oscillator Goes Above -0.5:

Around -0.5 it is believed that price is neither overbought nor oversold.

Also, it is not in the bearish zone which is below -0.5.

Longing around this region would be an early entry.

As such, there’s a lot of profit margin to cover.

You’d also have a good risk to reward.

Read Also: Higher High Lower Low Pattern Trading Strategy

Remember that you could also trade spot positions such as buying Bitcoin, Ethereum, Binance Coin, Matic, etc.

This signal would also serve as a good indicator to close short positions.

2. Long When oscillator Goes Above +0.5:

You can also buy or make long entries when price goes above +0.5.

But then your profit margin will be small.

This is because the oscillator is close to the overbought region. As such, there could be corrections in price soon.

Nonetheless, price can remain oversold for days if not weeks.

3. Short When Price Goes Below +0.5:

The oscillator below +0.5 means that it’s close to overbought level.

This means you’d be getting an early entry since you could hold the trade until price gets to -0.5 or goes below it.

The wide profit margin could also mean a better risk to reward.

On the other hand, this signal can be used to exit a long position or take profit.

4. Short When Oscillator Goes Below -0.5:

It’s still possible to cart profit from the market when the oscillator trades below -0.5.

You’d be using a tight stop in this case since price is already close to being extremely oversold.

Frequently Asked Questions

Here are answers to some frequently asked questions

1. Stochastic Oscillator Success Rate

The stochastic oscillator has a high accuracy even though it can’t be tied to a certain number.

The indicator’s success rate also relies on your ability to read its signals clearly.


2. What is the Opposite of Stochastic

RSI can be called the opposite of stochastic.

It yields overbought and oversold regions just like the stochastic.

However, the market is considered overbought when the oscillator goes above 70 and not 80 as is the case of stochastic.

Also, oversold readings on RSI begin from 30 and not 20.

Final Words

The Inverse Fisher Transform stochastic is a bit of a complex concept.

That’s why you don’t have to modify your indicator from scratch.

You can simply use an indicator that has already been tweaked to offer clearer signals.

It’ll go a long way to improve your confidence in the signals offered by the indicator.

But try not to have a heavy reliance on these indicators.

Because at the end of the day, price is what you should really be paying attention to.

Got contributions regarding the Inverse Fisher Transform in relation to RSI, Stochastic, or other oscillators?

Let me know in the comment section.

FAQs

What is the best setting for stochastic indicator? ›

80 and 20 are the most common levels used, but can also be modified as required. For OB/OS signals, the Stochastic setting of 14,3,3 works well. The higher the time frame the better, but usually a H4 or a Daily chart is the optimum for day traders and swing traders.

What is inverse Fisher indicator? ›

The Inverse Fisher Transform (IFISH) was authored by John Ehlers. The IFISH applies some math functions and constants to a weighted moving average (wma) of the relative strength index (rsi) of the closing price to calculate its oscillator position. The user may change the input (close) and period lengths.

What time frame is best for Stochastic RSI? ›

As mentioned before, the normal default settings for RSI is 14 on technical charts. But experts believe that the best timeframe for RSI actually lies between 2 to 6. Intermediate and expert day traders prefer the latter timeframe as they can decrease or increase the values according to their position.

How do you read a Fisher indicator? ›

The indicator has two lines that move up and down. One of the lines is known as Fisher while the other one is known as the Trigger. The other horizontal lines range between 1.5 and -1.5. Therefore, as with all similar indicators, traders watch closely areas where the two lines intersect.

What is a good stochastic number? ›

Understanding the Stochastic Oscillator

The stochastic oscillator is range-bound, meaning it is always between 0 and 100. This makes it a useful indicator of overbought and oversold conditions. Traditionally, readings over 80 are considered in the overbought range, and readings under 20 are considered oversold.

How accurate is stochastic indicator? ›

Key Takeaways. Stochastics are a favored technical indicator because they are easy to understand and have a relatively high degree of accuracy. It falls into the class of technical indicators known as oscillators. The indicator provides buy and sell signals for traders to enter or exit positions based on momentum.

How do you trade with Fisher transform? ›

How to use the Fisher Transform Indicator - Day Trading - YouTube

How do you interpret an Aroon indicator? ›

How this indicator works. If the Aroon-Up crosses above the Aroon-Down, then a new uptrend may start soon. Conversely, if Aroon-Down crosses above the Aroon-Up, then a new downtrend may start soon. When Aroon-Up reaches 100, a new uptrend may have begun.

What is Ichimoku cloud indicator? ›

What Is the Ichimoku Cloud? The Ichimoku Cloud is a collection of technical indicators that show support and resistance levels, as well as momentum and trend direction. It does this by taking multiple averages and plotting them on a chart.

What is super trend indicator? ›

A super-trend indicator is plotted on either above or below the closing price to signal a buy or sell. The indicator changes colour, based on whether or not you should be buying. If the super-trend indicator moves below the closing price, the indicator turns green, and it signals an entry point or points to buy.

What is Sure Thing indicator? ›

The Know Sure Thing (KST) is a momentum oscillator intended to interpret rate-of-change price data. Trading signals are generated when the KST crosses over the signal line, but traders also look for overbought or oversold conditions.

What is Hull moving average? ›

The Hull Moving Average (HMA), developed by Alan Hull, is an extremely fast and smooth moving average. In fact, the HMA almost eliminates lag altogether and manages to improve smoothing at the same time.

Is Stochastic better than RSI? ›

The Bottom Line. While relative strength index was designed to measure the speed of price movements, the stochastic oscillator formula works best when the market is trading in consistent ranges. Generally speaking, RSI is more useful in trending markets, and stochastics are more useful in sideways or choppy markets.

How do you get a smooth Stochastic? ›

Slow Stochastic for New Traders - YouTube

How do you use stochastic indicator effectively? ›

In a basic overbought/oversold strategy, traders can use the stochastic indicator to identify trade exit and entry points. Generally, traders look to place a buy trade when an instrument is oversold. A buy signal is often given when the stochastic indicator has been below 20 and then rises above 20.

What is the fastest indicator? ›

The STC indicator is a forward-looking, leading indicator, that generates faster, more accurate signals than earlier indicators, such as the MACD because it considers both time (cycles) and moving averages.

Which indicator is best for trend direction? ›

Top 5 Trend Indicators that identify the Direction of the Price Movements
  • Moving Average:
  • Supertrend:
  • Parabolic SAR:
  • On-Balance Volume:
  • MACD (Moving Average Convergence, Divergence):
8 Sept 2022

How do you swing trade with stochastics? ›

The BEST "STOCHASTIC" Trading Strategy | Better Than RSI - YouTube

What is the most accurate stock indicator? ›

MACD - Moving Average Convergence/Divergence

Several indicators in the stock market exist, and the Moving-Average Convergence/Divergence line or MACD is probably the most widely used technical indicator. Along with trends, it also signals the momentum of a stock.

Which is the best buy sell indicator in TradingView? ›

The Commodity Channel Index (CCI) is one of the most popular indicators on TradingView. The CCI is calculated by taking the difference between a stock or cryptocurrencies high and low, then dividing that value by the price range. This results in a number that is used to identify 'overbought' or 'oversold' conditions.

How do you use the elder Force Index? ›

How the Force Index Works. The force index is calculated by subtracting yesterday's close from today's close and multiplying the result by today's volume. If closing prices are higher today than yesterday, the force is positive. If closing prices are lower than yesterday's, the force is negative.

What is McGinley dynamic indicator? ›

The McGinley Dynamic indicator is a type of moving average that was designed to track the market better than existing moving average indicators. It is a technical indicator that improves upon moving average lines by adjusting for shifts in market speed.

What is MACD indicator? ›

The Moving Average Convergence/Divergence indicator is a momentum oscillator primarily used to trade trends. Although it is an oscillator, it is not typically used to identify over bought or oversold conditions. It appears on the chart as two lines which oscillate without boundaries.

Is Aroon indicator reliable? ›

The Aroon indicator is most accurate and useful when combined with analysis of price action and other technical indicators, as well as with fundamental analysis if long term trades are being placed.

Is Aroon a good indicator? ›

The Aroon indicator may at times signal a good entry or exit, but other times it will provide poor or false signals. The buy or sell signal may occur too late, after a substantial price move has already occurred. This happens because the indicator is looking backwards, and isn't predictive in nature.

Is Aroon lagging indicator? ›

It determines how long the price holds its momentum after reaching new highs or lows. It is easily visible on the indicator window, with the Aroon Up and Aroon Down lines. Note that, like other indicators, there is a slight lag with the Aroon indicator.

How accurate is Ichimoku? ›

The predictions over 5 and 10-day timeframes receive a boost in accuracy of just under 11% while the 15, 30, and 60-day timeframes receive increases of around 9%.

Which timeframe is best for Ichimoku? ›

If you are a day trader or scalper, then you can use Ichimoku on a shorter timeframe from a 1-minute chart, up to six hours. Conversely, if you are a longer-term trader such as myself, you can use Ichimoku on the daily or weekly charts.

Which timeframe is best for Ichimoku Cloud? ›

Ichimoku on shorter time frames from 1-minute chart to 6-hour. If you are a longer-term trader like myself, then you can use Mr. Ichimoku on the daily or weekly charts. A lot of times it helps if you zoom in and out of time frames to get a better understanding of the market sentiment.

How do you use the elder Force Index? ›

How the Force Index Works. The force index is calculated by subtracting yesterday's close from today's close and multiplying the result by today's volume. If closing prices are higher today than yesterday, the force is positive. If closing prices are lower than yesterday's, the force is negative.

What is MACD indicator? ›

The Moving Average Convergence/Divergence indicator is a momentum oscillator primarily used to trade trends. Although it is an oscillator, it is not typically used to identify over bought or oversold conditions. It appears on the chart as two lines which oscillate without boundaries.

What is Bollinger Band in stock market? ›

Bollinger Bands are envelopes plotted at a standard deviation level above and below a simple moving average of the price. Because the distance of the bands is based on standard deviation, they adjust to volatility swings in the underlying price. Bollinger Bands use 2 parameters, Period and Standard Deviations, StdDev.

What is McGinley dynamic indicator? ›

The McGinley Dynamic indicator is a type of moving average that was designed to track the market better than existing moving average indicators. It is a technical indicator that improves upon moving average lines by adjusting for shifts in market speed.

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