Reliable Signals Based on Fisher Transform for Algorithmic Trading

Abstract

Abstract Trading and investment on financial markets are common activities today. A very high number of investors, companies, public or private funds are buying and selling every day with a single purpose: the profit. The common questions for any market participant are: when to buy, when to sell and when is better to stay away from the market risk. In order to answer all these questions, many trading strategies are used to establish the best moments to entry or to exit the trades. Due to the large price volatility, a significant part of the trades is set up automatically today by computers using algorithmic trading procedures. For this particular field, special aspects must be met in order to automate the trading process. This paper presents one of these mathematical models used in automated trading systems, a method based on the Fisher transform. A general form of this method will be presented, the functional parameters and the way to optimize them in order to reduce the risk. It will be also suggested a method to build reliable trading signals with the Fisher function in order to be automated. Three different trading signal types will be explained together with the significance of the functional parameters in the price field. A code sample will be included in this paper to prove the simplicity of this method. Real results obtained with the Fisher trading signals will be also presented, compared and analyzed in order to show how this method can be implemented in algorithmic trading.