The Ultimate Oscillator is uniquely designed to avoid the pitfalls of other oscillators. This is because this oscillator incorporates different timeframes into its basic formula, thereby avoiding early exit of good trades. Let’s explore more about this oscillator.
What is Ultimate Oscillator?
Developed by Larry Williams in 1976, the Ultimate Oscillator (UO) basically measures momentum across multiple timeframes. It is based on mainly two variables – Buying Pressure and True Range. The UO uses three different time periods (7, 14, and 28) in order to represent short, medium, and long-term market trends.
The basic buy signal of the UO is based on a bullish divergence and the basic sell signal of the UO is based on a bearish divergence.
If you observe closely, you can see that the second timeframe (14) is twice that of the first (7), and the third timeframe (28) is two times that of the second. The most weightage is given to the shortest timeframe. But since the longest timeframe is also being considered, it helps to decrease the number of false divergences, thus lowering the early exits from trades.
The figure below shows the Ultimate Oscillator.
The Ultimate Oscillator can be used on hourly charts, daily charts, weekly charts, or even monthly charts.
Ultimate Oscillator and Buying Pressure
The Ultimate Oscillator can be used to gauge the buying pressure.
- Whenever the UO rises, it implies that the buying pressure is said to be strong.
- Whenever the UO falls, it implies that the buying pressure is said to be weak.
Ultimate Oscillator and Oversold/ Overbought Levels
The Ultimate Oscillator can be used to identify the oversold and overbought levels.
- When the value of UO is above 70, it is called as overbought. This means that either the stock price may fall soon, or that there is intense buying that is making the reading to become extremely high, but the buying could continue for a day or two more.
- When the value of UO is below 30, it is called as oversold. This means that either the stock price may increase soon, or that there is intense selling that is making the reading to become extremely low but the selling could continue for a day or two more.
Ultimate Oscillator and Divergences
Divergences play an important part in the case of the Ultimate Oscillator.
- Whenever the stock’s price makes a lower low but is not confirmed by a lower low in the Ultimate Oscillator, it is called as a bullish divergence. If the low of the UO Divergence is below 30, forms a higher low, and then breaks above the previous high, the stock typically moves higher.
- Whenever the stock’s price makes a higher high but is not confirmed by a higher high in the Ultimate Oscillator, it is called as a bearish divergence. If the high of the UO Divergence is above 70, forms a lower high, and then breaks below the previous low, the stock typically moves lower.
The figure below shows how to use the Ultimate Oscillator for identifying good trade setup.