My Secret Trend Indicator

My Secret Trend Indicator

If you are looking for a reliable way to identify whether or not a trend exists and to find out at the earliest time possible, then look no further. I'm going to share with you a simple indicator that does an outstanding job at this.

First a confession though. It's not really secret, and it's not mine! That is I didn't invent it. It's mine in that I use it regularly and value it very much. I've used it for so long, I'm not sure exactly where I picked it up, but I believe it was from the writings of John Ehlers. I call it secret because I rarely see it elsewhere, which surprises me since I personally feel it is very useful.

The Inverse Fisher Transform indicator is the indicator we are leading up to. It is very easy to read, and can be applied to various inputs or indicators. Here though, we will apply it to RSI, a standard indicator we are all familiar with. Note the chart below. The upper window contains the price, and the lower window contains the Inverse Fisher Transform (IFT). When the blue line (IFT) is above the green line (0.5), an upward trend exists. When the blue line is below the red line (-0.5), a downward trend exists. When the blue line is between the green and red lines, then there are no existing trends, indicating the market is in a trading range.

To really appreciate how effective this indicator is, lets compare it to the usual RSI we are used to seeing. Using the standard 30 / 70 lines as oversold and overbought thresholds, note below how the IFT gives you advance notice of when these conditions start and end when compared to RSI.

Lets follow the signals in the above comparison from left to right. In the first red circle, in the middle of July the IFT indicates a downtrend, but the RSI does not pick this up for another full 7 bars, and it barely dips into the 30 range at that! Next, in the middle of August the IFT notes another down trend. As it turns out it is not a strong one, but the RSI doesn't indicate this at all. Then in September, the IFT indicates an uptrend. This one turns out to be very strong, but the RSI only picks this up a the very end of the trend, 20 bars after the IFT does. Lastly, in November the IFT indicates a downtrend, but not before giving an early or false signal, depending upon how you look at it. Again, even counting from the second IFT short signal, the RSI is still 6 bars behind.

Is this a "Holy Grail"? Not at all! It is not going to tell you when to enter or exit the market for a profit, but it sure is a great tool for confirming where the market is headed as early as possible is so you can apply your trading strategy in the best direction. I can't tell you how much time I have spent over the years trying to get indicators to give me just one more days notice of changing conditions. With that in mind, it has been a real gift to come across this indicator, as it consistently provides much more than that.

The Inverse Fisher Transform formula is also simple. Below it is written for Amibroker, but it is so simple you should be able to easily translate it to the charting software of your choice;

Value1=0.1*(RSI(5)-50);
Value2=WMA(Value1,9);
ifish=(exp(2*Value2)-1)/(exp(2*Value2)+1);
Plot(ifish,"Inverse Fisher Transform",colorBlue,1);
Plot(0.5,"",colorBrightGreen,1);
Plot(-0.5,"",colorRed,1);

So there you have it, another great trading tool. Remember though, a tool is only useful in the hands of a skilled craftsman. So, study it and practice with before committing your hard earned money to it.

KNOWLEDGE IS POWER

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