After noticing this, Bill the second comes with an idea to get rich. When a version of Bill the first appears who is selling an apple far away from the average, let’s say for 1 dollar, Bill the second happily buys an apple. Then, since he knows most versions of Bill the first are looking to trade an apple around 5 dollars, Bill the second can wait for Bill the first to appear who is willing to buy an apple for 5 dollars or higher. Since the price stayed near the 5 dollars most of the time, Bill the second made money by buying when the price made a move significantly lower than the average and by selling when the price made a move significantly higher than the average.
In simple words, that’s pretty much what the Fisher Transform Indicator shows. Fisher Transform signals when the price has moved significantly by looking at recent price data. If you want to make money like Bill the second by trading when the price makes a significant move, the Fisher Transform Indicator is for you.
This is what it looks like on TradingView and will come with a default length of 9. It will also come with two lines called the Fisher and the Trigger line.
Similar to Bill the first example, Fisher Transform can be used to find reversals. But remember, unlike Bill the first example where versions of Bill the first were only buying and selling between 1 dollar and 10 dollars, the Fisher Transform is unbounded.
It means that the Fisher Transform value can go in one direction for a long time.
In the range market, when the Fisher Transform goes significantly below the zero line, it is a good idea to look for buying opportunities. Many traders also use the crossover of the Fisher and Trigger lines to generate entry signals. When the Fisher Line crosses above the Trigger Line below the zero line, it is a buy entry signal. When the Fisher Transform goes significantly above the zero line in the range market, it is a good idea to look for selling opportunities. Many traders will sell when the Fisher Line crosses below the Trigger Line above the zero line.
That’s good for the range market, but in an up-trending market, the Fisher Transform will give a lot of false short entry signals since the previous extreme highs are easily crossed. Similarly, there will be a lot of false long entry signals when the price is breaking the previous swing low in a downtrend.
So when the price is above the 200 EMA, many traders will only look for long signals and will buy when the Fisher Line gives a long crossover below the zero line. Set the stoploss below the pullback. And when the price is below the 200 EMA, many traders will sell when the Fisher Line gives a short crossover above the zero line. Set the stoploss above the pullback.
We will test this Fisher Transform Trading Strategy 100 times in the next video to find its win rate and to see how it compares with other trading strategies we have tested so far on the Trading Rush Channel.