Trading the Ultimate Oscillator

The Ultimate Oscillator is a momentum oscillator developed by Larry Williams in 1976 designed to capture momentum across three different time frames. This indicator is unique in that it combines three time periods: Short-, intermediate- and long-term into one oscillator. Short-term oscillators tend to signal oversold conditions too early in the trend, while longer time periods tend to give late entry signals, often when the rally has almost expired. The Ultimate Oscillator attempts to correct these faults by incorporating longer time frames into the basic formula.

Williams identified a buy signal based on a bullish divergence and a sell signal based on a bearish divergence. The key feature of the Ultimate Oscillator is that it uses three time frames in order to minimize false signals. The Ultimate Oscillator can be used in any time frame: Short-term trading, day trading, swing trading or long-term trading; and can be applied to financial futures, stocks or commodities.

The Ultimate Oscillator calculations are complex. The steps to calculate the value are listed below, though many charting software packages include the indicator so you will not need to do all these calculations (see “The Ultimate,” below). This example is based on the default settings (7, 14, 28).

1. Calculate Buying Pressure (BP) to determine the overall direction of price action.

2. Measure Buying Pressure relative to the True Range (TR). This tells us the true magnitude of a gain or loss.

3. Create averages based on the three time frames involved (7, 14, 28).

4.  Create a weighted average of the three averages.

BP = Close - Minimum (Low or Prior Close).

TR = Maximum (High or Prior Close) - Minimum (Low or Prior Close)

Average7 = (7-period BP Sum) / (7-period TR Sum)

Average14 = (14-period BP Sum) / (14-period TR Sum)

Average28 = (28-period BP Sum) / (28-period TR Sum)

Ultimate Oscillator = 100 x [(4 x Average7)+(2 x Average14)+Average28]/(4+2+1)

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