Stocks & Commodities V. 28:10 (38-44): A Smoothed RSI Inverse Fisher Transform by Sylvain Vervoort

Stocks & Commodities V. 28:10 (38-44): A Smoothed RSI Inverse Fisher Transform by Sylvain Vervoort
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A Smoothed RSI Inverse Fisher Transform by Sylvain Vervoort

This indicator gives clear entry and exit signals, so your trading decisions are easier.

The Fisher transform has been a familiar concept to Stocks & Commodities readers in recent years following its introduction in 2002 by frequent S&C contributor John Ehlers. Its creator, Ronald Fisher, was one of the leading scientists of the 20th century, making major contributions to statistics, evolutionary biology, and genetics. Ehlersí 2004 followup applied an inverse Fisher transform to the relative strength index (Rsi), changing what was a good turning-point indicator to one that fine-tuned the timing of possible entry and exit points. Here is the inverse Fisher transform formula:

y = (Exp(2 * x) - 1)/(Exp(2 * x) + 1)

where x is the input value and y is the transformed value.

Figure 1 shows a plot of the inverse Fisher transform. The transform creates boundaries to keep the output value in the range between ‑1 to +1. Input values larger than 2 generate a result close to 1, while input values less than ‑2 generate a result close to ‑1. This boundary characteristic is useful with any indicator moving between two fixed values, like the relative strength index (Rsi).

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