What is Ultimate Oscillator Indicators| How to Use this Indicator

The Ultimate Oscillator, developed by Larry Williams in 1976, is a technical momentum indicator that uses the weighted average of three different time periods to reduce the volatility and false transaction signals associated with many other momentum oscillators. By integrating a long-term, medium-term, and short-term time frame, the Ultimate Oscillator aims to capture momentum across multiple horizons.

What it is and what it shows

The Ultimate Oscillator measures the buying pressure to ascertain whether a stock is being accumulated or distributed. It contrasts buying pressure to the stock’s true range, which offers a more accurate depiction of the market’s movements.

The formula for the Ultimate Oscillator is a bit involved:
UO = 100 x (BP7 + BP14 + BP28) / (TR7 + TR14 + TR28)

Where:

• BP is Buying Pressure, calculated as close minus the lesser of the low or the previous close.

• TR is the True Range, which is the greatest of:

• Current High minus current Low
• The absolute value of the current High minus the previous Close
• The absolute value of the current Low minus the previous Close

The values 7, 14, and 28 are typical time periods used.

How to trade it

1. Divergences: A bullish divergence occurs when prices form a new low while the Ultimate Oscillator does not. Conversely, a bearish divergence appears when prices set a new high, but the oscillator does not follow suit. Such divergences can indicate a potential trend reversal.

Example: If a stock hits a new low but the Ultimate Oscillator remains above its prior low, this might hint at a looming bullish divergence.

2. Overbought and Oversold Conditions: Common thresholds are set at 70 for overbought and 30 for oversold, although these can vary. A buy signal might be given when the oscillator falls below 30 and then rises back above it. Similarly, a sell signal could be signaled when the oscillator surpasses 70 and then drops back below.

Example: If the oscillator dives to 28 and then rebounds to 32, it could be construed as a buy signal.

3. Bullish Buy and Bearish Sell Signals: Larry Williams, the creator, provided a complex method for interpreting buy and sell signals based on the interaction of the oscillator with these overbought and oversold thresholds, coupled with divergences. For instance, for a buy signal:

– The oscillator falls below 30.
– A bullish divergence is confirmed.
– The oscillator rises above the divergence high.

These conditions, though specific, can offer high probability trade opportunities when met.

The Ultimate Oscillator, by integrating different timeframes into its calculations, offers traders a robust tool to understand momentum and potential reversals. Its unique methodology, focusing on buying pressure relative to the true range, can help reduce false signals. However, like all technical indicators, it shines brightest when used in tandem with other tools and within the broader context of market analysis.