Ultimate Oscillator Indicator was developed by Larry Williams in 1976. This was featured in Stocks and Commodities Magazine in 1985. The Ultimate Oscillator is a momentum oscillator which was designed to capture momentum across three different time frames. The multiple time frame of this oscillator seeks to avoid the pitfalls of other oscillators. Most of the momentum oscillators use a single-time frame. In a bearish divergence and overbought readings while the advance continues of this indicator. The Ultimate Oscillator is attempted to correct this by using three different time periods are 7, 14, and 28 to represent short, medium, and long-term market trends.
Usage of the Ultimate Oscillator Indicator :
If traders want to know further information about the Ultimate Oscillator indicator, then they can go through the STUDIES section of Zerodha Kite. This indicator also available in Kite mobile App. Cycle 1 is 7, Cycle 2 is 14 and Cycle 3 is 28. If you want to change the value then change the value of high and low. The overbought value is 70 and the OverSold value is 30. If you want to change the overbought value and the OverSold then value then you can set these value high and low. Charts include various time limits, daily, weekly, monthly or intraday. The attachment process of the Ultimate Oscillator indicator to Reliance Industries share price chart is given.
Calculation of the Ultimate Oscillator Indicator :
BP (Buying Pressure) = Current Close – Minimum (which is Current Low or Previous Close).
TR (True Range) = Maximum (which is Current High or Previous Close) – Minimum (which is Current Low or Previous Close).
Average 7 = Average 7 is the sum of Buying Pressure for the past 7 days or sum of True Range for the past 7 days.
Average 14 = As the same way, it is some of BP for the past 14 days or sum of TR for the past 14 days.
Average 28 = Similarly, this is calculating the sum of True Range for the past 28 days or sum of True Range for the past 28 days.
Ultimate Oscillator Indicator = 100 * [(4 * Average 7) + (2 * Average 14) + Average 28] / (4 + 2 + 1)
The Ultimate Oscillator indicator base for True Range forms the Buying Pressure and its relationship. The developer of this indicator Williams believes that the best way to measure Buying Pressure is simply subtracting the Close from the Low or the Prior Close, whichever of the two is the lowest. This Ultimate Oscillator will reflect the true magnitude of the advance, and hence, buying pressure. This indicator rises when Buying Pressure is strong and falls when Buying Pressure is weak. The Ultimate Oscillator indicator measures momentum for three distinct time frames. The second time frame of this indicator is double that of the first, and the third time frame is double that of the second. Even though the shortest time frame of Ultimate Oscillator carries the most weight. Also, the longest time frame of Ultimate Oscillator is not ignored and this should reduce the number of false divergences. This is the main important thing of this indicator because the basic buy signal is based on a bullish divergence. On the other hand, the basic sell signal is based on a bearish divergence.
Time frames of Ultimate Oscillator Indicator :
The Ultimate Oscillator traders can use intraday, daily, weekly or monthly charts. This indicator is sometimes necessary to adjust the parameters to generate overbought or oversold readings, which are part of the buy and sell signals. Relatively docile stocks or securities may not generate overbought or oversold readings with the default parameters are 7,14 and 28. The traders need to increase sensitivity with shorter time frames. The chart for Boeing (BA) shows the Ultimate Oscillator indicator (7,14,28) trading between 30 and 70 for six months. There were no overbought or oversold readings. The time frame of this indicator to (4,8,16) increased sensitivity and generated at least six overbought or oversold readings. The opposite value is true for securities with high volatility of this indicator. The Ultimate Oscillator sometimes necessary to lengthen the time frames to reduce sensitivity and the number of signals.
How this indicator works :
Buy Signal :
- The Ultimate Oscillator indicator occurs a bullish divergence. This is when the security’s price makes a lower low that is not confirmed by a lower low in this Oscillator.
- During the bullish divergence, the low of the Ultimate Oscillator falls below 30.
- This Oscillator then rises above the highest point reached during the span of the bullish divergence.
Sell Signal :
- The Ultimate Oscillator indicator occurs a bearish divergence. This is when the security’s price makes a higher high that is not confirmed by a higher high in this Oscillator.
- During the bearish divergence, the high of the Ultimate Oscillator rises above 70.
- This Ultimate Oscillator then falls below the lowest point during the span of the bearish divergence.
The Ultimate Oscillator indicator is a momentum oscillator that incorporates three different time frames. Traditional signals are derived from bullish and bearish divergence of Ultimate Oscillator. But traders can also look at actual levels for a trading bias of this indicator. This indicator mainly works better with longer parameters and longer trends. The Ultimate Oscillator indicator (20,40,80) and price trend favors the bulls when above 50 and the bears when below 50. Same as all indicators, the Ultimate Oscillator indicator should not be used alone.
Categories: Technical Indicators