Inverse Fisher Transform on SMI (Stochastic Momentum Index)

The Inverse Fisher Transform on SMI (Stochastic Momentum Index) indicator combines the responsiveness of the SMI with the signal-sharpening properties of the Inverse Fisher Transform to provide clear, bipolar entry and exit signals.

Usage

The Inverse Fisher Transform on SMI is primarily used to identify high-probability turning points in the market. By applying the Inverse Fisher Transform, the standard oscillator values are compressed toward the boundaries of +1 and -1, creating a "black-or-white" indication for traders.

• Bullish Signal: A bullish signal is generated when the indicator crosses above the -0.5 level. This suggests that momentum is shifting upward from an oversold state.
• Bearish Signal: A bearish signal is generated when the indicator crosses below the 0.5 level. This suggests that momentum is shifting downward from an overbought state.

The indicator is designed to stay near its extremes (+1 or -1) during strong trends, helping traders avoid premature exits, while providing sharp crossovers when the trend actually reverses.

Details

Developed by John Ehlers, the Inverse Fisher Transform (IFT) aims to alter the Probability Distribution Function (PDF) of an indicator. While many oscillators spend a significant amount of time in "middle" zones, the IFT forces the output to be bipolar.

In this specific implementation, the Stochastic Momentum Index (SMI) serves as the base input. The SMI is a refinement of the traditional Stochastic Oscillator, calculating the distance of the current close relative to the midpoint of the high/low range. By applying a Weighted Moving Average (WMA) for smoothing followed by the IFT formula, the resulting output becomes a highly reactive signal line that oscillates between -1 and +1 with clear threshold crossings at 0.5 and -0.5.

Settings

Main Settings

• Stochastic Momentum length: Determines the lookback period for the highest high and lowest low used in the SMI calculation.
• Smoothing length: Sets the period for the Weighted Moving Average (WMA) applied to the SMI before the Inverse Fisher Transform.
• Inner EMA length: The first smoothing period (EMA) applied to the raw momentum and price range values.
• Outer EMA length: The second smoothing period (EMA) applied to the already smoothed momentum and range values.

FAQ

How do I interpret the +1 and -1 levels?

The Inverse Fisher Transform compresses the data so that values spend most of their time near +1 (strong bullish momentum) or -1 (strong bearish momentum). The crossings of the 0.5 and -0.5 levels are the primary triggers for trade considerations.

Can this indicator be used on any timeframe?

Yes, the Inverse Fisher Transform on SMI can be applied to any timeframe. However, users should adjust the length settings to account for the noise levels inherent in lower timeframes.

How can I access this indicator?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.