The Ultimate Oscillator is a technical indicator designed by Larry Williams in 1976. This tool is unique in its approach as it calculates price momentum over three different timeframes, which results in a more stable and reliable reading compared to other single-timeframe oscillators. Unlike many momentum indicators, the Ultimate Oscillator successfully lowers the volatility and noise in its readings, providing traders with fewer but more accurate signals.
Key Takeaways
- The indicator integrates three-time frames: 7, 14, and 28 periods.
- The shortest timeframe has the highest weight, while the longest timeframe has the least.
- Buy signals appear during bullish divergence when the value is below 30 and later rises above the divergence high.
- Sell signals emerge with bearish divergence which starts above 70 and then falls below the divergence low.
The Formula for the Ultimate Oscillator
The Ultimate Oscillator formula is expressed as follows:
$$ UO = \left[ \frac{ ( A_7 \times 4 ) + ( A_{14} \times 2 ) + A_{28} }{ 4 + 2 + 1 } \right] \times 100 $$
Where:
- A = Average Buying Pressure (BP) = Close − Min(Low, Prior Close)
- Prior Close = Closing price of the previous period
- True Range (TR) = Max(High, Prior Close) - Min(Low, Prior Close)
- Average_7 = Sum of BP over 7 periods / Sum of TR over 7 periods
- Average_14 = Sum of BP over 14 periods / Sum of TR over 14 periods
- Average_28 = Sum of BP over 28 periods / Sum of TR over 28 periods
How to Calculate the Ultimate Oscillator
- Calculate Buying Pressure (BP): Determine BP as the close price minus the lower of the period low or the prior closing price for each period.
- Calculate True Range (TR): The TR is the difference between the highest of the current period high or prior close and the lowest of the period low or prior close.
- Determine Average Periods: Calculate Average 7, 14, and 28 combining BP and TR sums. For example, the Average 7 utilizes BP sums of the past 7 periods.
- Final Calculation: Integrate the weighted average formula using average periods, weighting 7-period as four, 14-period as two, and 28-period as one then multiply by 100.
What Does the Ultimate Oscillator Tell You?
Operating within a range of 0 to 100, the Ultimate Oscillator provides insights on momentum trends. Indicators below 30 signify oversold conditions while values surpassing 70 suggest overbought conditions.
Developed in 1976, Williams revealed his innovation in 1985 within Stocks \& Commodities Magazine. Many conventional oscillators are too influenced by short-term price momentum, but Williams’ invention leverages multiple timeframes to mitigate false divergences and offer a more stable reflection of true market momentum.
For a buy signal:
- Identify a bullish divergence (an instance where the price marks a lower low but the oscillator shows a higher low).
- The initial low of the divergence should be under 30, signaling an oversold start, making an upside reversal more probable.
- The oscillator needs to climb above the divergence high.
And for a sell signal:
- Spot a bearish divergence (a scenario where the price forms a higher high while the indicator creates a lower high).
- The first divergence high should exceed 70 suggesting an overbought status and a likely downside reversal.
- The oscillator must drop beneath the divergence low.
Comparing the Ultimate Oscillator and Stochastic Oscillator
While the Ultimate Oscillator uses three lookback periods, the Stochastic Oscillator employs just one. This results in different trade signals since each uses distinct calculations. Furthermore, the Ultimate Oscillator’s three-step divergence method sets it apart.
Limitations of Using the Ultimate Oscillator
Though the threefold technique of the Ultimate Oscillator can help filter out certain unfavorable trades, it also omits some beneficial ones since not all price reversals exhibit divergence. Additionally, reversals don’t consistently stem from overbought or oversold zones, leading to challenges in timing entry points as the price may have shifted notably by the time confirmation occurs.
As no indicator guarantees absolute accuracy, the Ultimate Oscillator should form part of a comprehensive trading plan including varied price analysis strategies, technical indicators, and fundamental analysis for a holistic market assessment.
Related Terms: Relative Strength Index (RSI), Stochastic Oscillator, Price Analysis, Fundamental Analysis.
References
- Williams Percent R Indicator. “Larry Williams Ultimate Oscillator”.
