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 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 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.

What is the best directional indicator? ›

The average directional index (ADX) is used to determine when the price is trending strongly. In many cases, it is the ultimate trend indicator.
...
Quantifying Trend Strength.
ADX ValueTrend Strength
0-25Absent or Weak Trend
25-50Strong Trend
50-75Very Strong Trend
75-100Extremely Strong Trend

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.

Which is more reliable RSI or stochastic? ›

Generally speaking, RSI is more useful in trending markets, and stochastics are more useful in sideways or choppy markets.

Which technical indicator is the most accurate? ›

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.

What is the best Stoch RSI setting for day trading? ›

RSI (2-period) (90/1)

Because 2 is such a short timeframe, Connors attempts to filter out the false signals by using the 90 and 10 levels instead of the 70 and 30 levels for overbought and oversold. In essence this a trading method to buy the dip and sell the rip.

Which indicator is better MACD or stochastic? ›

Separately, the two indicators function on different technical premises and work alone; compared to the stochastic, which ignores market jolts, the MACD is a more reliable option as a sole trading indicator.

How do you use a stochastic indicator like a pro? ›

Add 200 Exponential moving average (EMA) to identify the direction of the trend. If the price is above 200 EMA you buy and if the price is below 200 EMA you sell. Add 20 EMA for filtering the signals given by stochastic indicator. Use stochastic overbought and oversold condition to generate buy and sell signals.

Is stochastic good for day trading? ›

The slow stochastic is one of the most popular indicators used by day traders because it reduces the chance of entering a position based on a false signal. You can think of a fast stochastic as a speedboat; it is agile and can easily change directions based on sudden movement in the market.

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.

How do you swing trade with stochastics? ›

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

What is a good stochastic %K? ›

The fast stochastic oscillator (%K) is a momentum indicator, and it is used to identify the strength of trends in price movements. It can be used to generate overbought and oversold signals. Typically, a stock is considered overbought if the %K is above 80 and oversold if %K is below 20.

What is the best period for stochastic oscillator? ›

The default setting for the Stochastic Oscillator is 14 periods, which can be days, weeks, months or an intraday timeframe. A 14-period %K would use the most recent close, the highest high over the last 14 periods and the lowest low over the last 14 periods.

Is stochastics a leading indicator? ›

Another popular example of a leading indicator is the stochastic oscillator, which is used to compare recent closing prices to the previous trading range.

How do you study a stochastic indicator? ›

Stochastic Indicator Secrets: Trading Strategies To Profit In Bull & Bear ...

What is the best indicator for 1 minute chart? ›

First off, both SMA and EMA are some of the best indicators for 1 minute chart. The Simple Moving Average (SMA) tracks the average closing price of the last number of periods. For example 50 day SMA will indicate the average closing price of 50 trading days, where all of them are given equal weight in the indicator.

What is the best indicator for 5 min chart? ›

The five-minute momo looks for a momentum or "momo" burst on very short-term (five-minute) charts. First, traders lay on two technical indicators that are available with many charting software packages and platforms: the 20-period exponential moving average (EMA) and moving average convergence divergence (MACD).

Which indicator is best for trend reversal? ›

RSI. Relative Strength Index or RSI is one of the most commonly used indicators in intraday trading. RSI is a momentum indicator and is very useful when a trader is looking for a trend reversal or just the movement of the market.

What is Fisher coefficient? ›

The definition of the correlation coefficient given by Fisher is as follows: r = S ( x y ) S ( x 2 ) ⋅ S ( y 2 ) where and represent deviation from their respective means. This expression is derived from statistical considerations.

How do you read a universal indicator? ›

How To Read pH Test Strips For Liquids - YouTube

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.

How do you trade with Fisher transform? ›

How to use the Fisher Transform Indicator - Forex Day Trading

What is the guppy indicator? ›

The Guppy Multiple Moving Average (GMMA) is a technical indicator that identifies changing trends, breakouts, and trading opportunities in the price of an asset by combining two groups of moving averages (MA) with different time periods.

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.

Is there a better indicator than RSI? ›

The MFI indicator (money flow index) is similar to RSI but incorporates volume as well. MFI is not as popular as RSI, however, MFI works just as well, and in many cases, works better than RSI for short-term trading and swing trading.

Can I use RSI and stochastic together? ›

The next strategy useful in performing swing trades is a combination of two technical indicators RSI and Stochastics.

Is 40 RSI good? ›

Relative Strength Index (RSI)

The RSI oscillates between zero and 100. Traditionally the RSI is considered overbought when above 70 and oversold when below 30.

Which is the most accurate trading strategy? ›

Trend trading is one of the most reliable and simple forex trading strategies. As the name suggests, this type of strategy involves trading in the direction of the current price trend. In order to do so effectively, traders must first identify the overarching trend direction, duration, and strength.

Which indicator is best for 15 min chart? ›

The best indicator to use on a 15-minute chart for optimum profits is the combination of the Supertrend indicator, the 5 EMA, and the 20 EMA. A Supertrend indicator is pretty similar to Moving Averages in the sense that it is plotted on price and can determine the current market price trends.

Do professional traders use indicators? ›

Professional traders combine market knowledge with technical indicators to prepare the best trading strategy. Most professional traders will swear by the following indicators. Indicators offer essential information on price, as well as on trend trade signals and give indications on trend reversals.

Is Stochastic good for scalping? ›

Scalping can be accomplished using a stochastic oscillator. The term stochastic relates to the point of the current price in relation to its range over a recent period of time. By comparing the price of a security to its recent range, a stochastic attempts to provide potential turning points.

Should you sell when RSI is above 70? ›

Investors using RSI generally stick to a couple of simple rules. First, low RSI levels, typically below 30 (red line), indicate oversold conditions—generating a potential buy signal. Conversely, high RSI levels, typically above 70 (green line), indicate overbought conditions—generating a potential sell signal.

Is the 5 minute chart best for day trading? ›

What is the best time frame for day trading forex? In volatile market hours, the 5 minute and 1 minute time frame are best for day trading forex. In side-hours where volatility is low, the higher time frames like the 15 and 60 minute chart are more reliable for spotting the trend.

Which oscillator is best for trading? ›

5 Best Trading Oscillator Indicators to Find Market Entries
  • Stochastics. ...
  • Relative Strength Index (RSI) ...
  • Commodity Channel Index (CCI) ...
  • Moving Average Convergence Divergence (MACD) ...
  • Awesome Oscillator (AO)
15 Mar 2021

Which is the most accurate indicator for intraday trading? ›

Momentum traders consider MACD as one of the most reliable and best indicators for intraday trading. This indicator provides information on trend direction, momentum, and duration. The MACD indicator is based on the convergence and divergence of two moving averages.

Do professional traders use MACD? ›

MACD Trading Strategies. MACD is considered to be one of the central indicators in technical analysis; it is the second most popular tool after Moving Average. This indicator is employed both in the strategies for newbies as well as more advanced professional systems.

What are all the four types of stochastic process? ›

Some basic types of stochastic processes include Markov processes, Poisson processes (such as radioactive decay), and time series, with the index variable referring to time. This indexing can be either discrete or continuous, the interest being in the nature of changes of the variables with respect to time.

What is the red line in stochastic? ›

The Stochastic technical indicator tells us when the market is overbought or oversold. The Stochastic is scaled from 0 to 100. When the Stochastic lines are above 80 (the red dotted line in the chart above), then it means the market is overbought.

What speed do I need for day trading? ›

Day trading requires a minimum download speed of 1 megabyte. You will not experience any lagging with this speed unless the internet is unstable. However, while the minimum speeds required for both upload and download are just enough, the internet tends to go down sometimes.

Which time frame is best for day trading? ›

One to two hours of the stock market being open is the best time frame for intraday trading. However, most stock market trading channels open from 9:15 am in India.

What is the best minute chart for day trading? ›

A 10- or 15-minute chart time frame is for someone who wants to see the major trends and movements throughout the trading day, not each little gyration (5-minute, and to a greater extent the 1-minute). If you want to trade on a 15-minute chart, build and test the strategy on a 15-minute chart.

What is a good stochastic %K? ›

The fast stochastic oscillator (%K) is a momentum indicator, and it is used to identify the strength of trends in price movements. It can be used to generate overbought and oversold signals. Typically, a stock is considered overbought if the %K is above 80 and oversold if %K is below 20.

How do you use a stochastic indicator like a pro? ›

Add 200 Exponential moving average (EMA) to identify the direction of the trend. If the price is above 200 EMA you buy and if the price is below 200 EMA you sell. Add 20 EMA for filtering the signals given by stochastic indicator. Use stochastic overbought and oversold condition to generate buy and sell signals.

Which is better stochastic RSI or MACD? ›

Separately, the two indicators function on different technical premises and work alone; compared to the stochastic, which ignores market jolts, the MACD is a more reliable option as a sole trading indicator.

Which is a better indicator RSI or stochastic? ›

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.

Which technical indicator is the most accurate? ›

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.

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? ›

The average directional index (ADX) is used to determine when the price is trending strongly. In many cases, it is the ultimate trend indicator.

What is the best period for stochastic oscillator? ›

The default setting for the Stochastic Oscillator is 14 periods, which can be days, weeks, months or an intraday timeframe. A 14-period %K would use the most recent close, the highest high over the last 14 periods and the lowest low over the last 14 periods.

Is stochastic good for scalping? ›

Scalping can be accomplished using a stochastic oscillator. The term stochastic relates to the point of the current price in relation to its range over a recent period of time. By comparing the price of a security to its recent range, a stochastic attempts to provide potential turning points.

How do you swing trade with stochastics? ›

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

Is stochastic good for day trading? ›

The slow stochastic is one of the most popular indicators used by day traders because it reduces the chance of entering a position based on a false signal. You can think of a fast stochastic as a speedboat; it is agile and can easily change directions based on sudden movement in the market.

Which oscillator is best for trading? ›

5 Best Trading Oscillator Indicators to Find Market Entries
  • Stochastics. ...
  • Relative Strength Index (RSI) ...
  • Commodity Channel Index (CCI) ...
  • Moving Average Convergence Divergence (MACD) ...
  • Awesome Oscillator (AO)
15 Mar 2021

Can you use RSI and stochastic together? ›

The relative strength index (RSI) is a tool designed to measure the rate of price movements, namely, speed. On the other hand, the Stochastic indicator measures momentum based on past time periods. The two tools work well together. Together, they make the Stochastic RSI that measures the RSI momentum.

Is 40 RSI good? ›

Relative Strength Index (RSI)

The RSI oscillates between zero and 100. Traditionally the RSI is considered overbought when above 70 and oversold when below 30.

Is 45 RSI good? ›

A reading of 50 on the RSI is considered neutral, indicating a balance between the bulls and the bears. The default setting on most charting software designates a reading above 70 as overbought and below 30 as oversold.

Is 50 RSI good? ›

Traditionally, RSI readings greater than the 70 level are considered to be in overbought territory, and RSI readings lower than the 30 level are considered to be in oversold territory. In between the 30 and 70 level is considered neutral, with the 50 level a sign of no trend.

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