Ultimate Oscillator

What is the Ultimate Oscillator?

The Ultimate Oscillator is a technical indicator that was developed by Larry Williams in 1976 to measure the price momentum of an asset across different time periods. By utilizing the weighted average of three unique time spans the indicator has less volatility and less trade signals compared to different oscillators that depend on a single time span. Buy and sell signals are created following divergences. The Ultimately Oscillator creates less divergence signals than different oscillators due to its multi-time span construction.

The Formula for the Ultimate Oscillator Is:

$\begin &\text = \left [ \frac{ ( \text$7 \times 4 ) + ( \text{14} \times 2 ) + \text{28} }{ 4 + 2 + 1 } \right ] \times 100 \ &\textbf \ &\text = \text \ &\text = \text \ &\text{Buying Pressure (BP)} = \text - \text ( \text, \text ) \ &\text = \text \ &\text{True Range (TR) } = \text ( \text, \text ) - \ &\phantom {\text{True Range (TR) } =} \text ( \text, \text ) \ &\text7 = \frac{ \sum^{7} \text }{ \sum^{{7} \text } \ &\text{14} = \frac{ \sum}{14} \text }{ \sum_^{{14} \text } \ &\text{28} = \frac{ \sum}{28} \text }{ \sum_^{28} \text } \ \end

Step by step instructions to Calculate the Ultimate Oscillator

1. Ascertain the Buying Pressure (BP) which is the close price of the period less the low of that period or prior close, whichever is lower. Record these values for every period as they will be summed up over the last seven, 14, and 28 periods to make BP Sum.
2. Compute the True Range (TR) which is the current period's high or the prior close, whichever is higher, minus the lowest value of the current period's low or the prior close. Record these values for every period as they will be summed up over the last seven, 14, and 28 periods to make TR Sum.
3. Work out Average7, 14, and 28 utilizing the BP and TR Sums calculations from stages one and two. For instance, the Average7 BP Sum is the calculated BP values added together for the last seven periods.
4. Compute the Ultimate Oscillator utilizing the Average7, 14, and 28 values. Average7 has a weight of four, Average14 has a weight of two, and Average28 has a weight of one. Sum the weights in the denominator (in this case, the sum is seven, or 4+2+1). Increase by 100 when different calculations are complete.

What Does the Ultimate Oscillator Tell You?

The Ultimate Oscillator is a range-bound indicator with a value that varies somewhere in the range of 0 and 100. Like the Relative Strength Index (RSI), levels below 30 are considered to be oversold, and levels over 70 are considered to be overbought. Trading signals are produced when the price moves the other way as the indicator, and depend on a three-step method.

Larry Williams developed the Ultimate Oscillator in 1976 and distributed it in Stocks and Commodities Magazine in 1985. With numerous momentum oscillators correlating too intensely to approach term price developments, Williams developed the Ultimate Oscillator to integrate various time periods to streamline the indicator's developments and give a more dependable indicator of momentum, with less false divergences.

False divergences are common in oscillators that main utilize one time period, since when the price floods the oscillator floods. Even on the off chance that the price keeps on rising the oscillator will in general fall forming a divergence even however the price might in any case be trending firmly.

For the indicator to produce a buy signal, Williams suggested a three-step approach.

• Initial, a bullish divergence must form. This is the point at which the price makes a lower low however the indicator is at a higher low.
• Second, the principal low in the divergence (the lower one) must have been below 30. This means the divergence began from oversold domain and is bound to bring about an upside price reversal.
• Third, the Ultimate oscillator must rise over the divergence high. The divergence high is the high point between the two lows of the divergence.

Williams made a similar three-step method for sell signals.

• Initial, a bearish divergence must form. This is the point at which the price makes a higher high yet the indicator is at a lower high.
• Second, the main high in the divergence (the higher one) must be over 70. This means the divergence began from overbought region and is bound to bring about a downside price reversal.
• Third, the Ultimate oscillator must drop below the divergence low. The divergence low is the low point between the two highs of the divergence.

The Difference Between the Ultimate Oscillator and Stochastic Oscillator

The Ultimate Oscillator has three lookback periods or time periods. The Stochastic Oscillator has only one. The Ultimate Oscillator doesn't commonly incorporate a signal line (one could be added), while the Stochastic does. While the two indicators produce trade signals in light of divergence, the signals will be different due to the various calculations. Likewise, the Ultimate Oscillator involves a three-step method for trading divergence.

Limitations of Using the Ultimate Oscillator

While the three-step trading method for the indicator might assist with wiping out a few poor trades, it likewise takes out numerous great ones. Divergence is absent at all price reversal points. Likewise, a reversal will not necessarily happen from overbought or oversold region. Additionally, waiting for the oscillator to move over the divergence high (bullish divergence) or below the divergence low (bearish divergence) could mean poor entry point as the price might have proactively run essentially in the reversal course.

Similarly as with all indicators, the Ultimate Oscillator ought not be utilized in disconnection, yet rather as part of a complete trading plan. Such a plan will normally incorporate different forms of analysis, for example, price analysis, other technical indicators, or potentially fundamental analysis.

Highlights

• A sell signal happens when there is bearish divergence, the divergence high is over 70, and the oscillator then, at that point, falls below the divergence low.
• The indicator utilizes three time spans in its calculation: seven, 14, and 28 periods.
• The more limited time period has the most weight in the calculation, while the more extended time period has the least weight.
• Buy signals happen when there is bullish divergence, the divergence low is below 30 on the indicator, and the oscillator then rises over the divergence high.