Mastering the Ultimate Oscillator Indicator

Ultimate Oscillator

Larry Williams developed the Ultimate Oscillator Indicator in 1976. This was featured in Stocks and Commodities Magazine in 1985. The Ultimate Oscillator is a momentum oscillator that 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.


What is Ultimate Oscillator?

The ultimate oscillator carries almost similar kind of characteristics to other oscillators. Like it has a range boundary of 0 to 100, it provides an idea of the strengths and weaknesses of stock price. Apart from similarity, by applying the weighted average of three separate timeframes, the indicator has less volatility. Also, fewer trade signals compared to other single timeframe oscillators.

How to use Ultimate Oscillator?

You can use the UO on charts for technical analysis. Most of the charting platforms offer an oscillator with other indicators. You can apply it along with other indicators oscillators also. Just beneath the price chart, you can add the oscillator section. For instance, in the Zerodha kite charting platform, you may find the indicator in the STUDIES section.

How to read the ultimate oscillator?

One of the most popular ways of reading UO or Ultimate Oscillator is by identifying the bearish and bullish divergence. Divergence is created when there are dissimilarities between the price and indicators movement. When the price makes lower lows but the indicator is higher highs, a bullish divergence appears. The opposite happens during the bearish divergence.

How to Attach up the Ultimate Oscillator on Charts?

On Zerodha Kite

If traders want to add the Ultimate Oscillator indicator, then they can go through the STUDIES section of Zerodha Kite. This indicator is 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 values 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.

Ultimate Oscillator Indicator in Zerodha Kite

On Upstox Pro

The next charting platform I am about to explain is Upstox Pro. Here, after opening any of your preferred charts, open the indicator list and search for the oscillator. Here, you can also customize the oscillator overbought oversold limit.

Ultimate Oscillator Indicator in Upstox

The Formula of the Ultimate Oscillator Indicator

  1. BP (Buying Pressure) = Current Close – Minimum (which is Current Low or Previous Close).
  2. TR (True Range) = Maximum (which is Current High or Previous Close) – Minimum (which is Current Low or Previous Close).
  3. And, Average 7 = Average 7 is the sum of Buying Pressure for the past 7 days or the sum of True Range for the past 7 days.
  4. Average 14 = In the same way, it is some BP for the past 14 days or the sum of TR for the past 14 days.
  5. Average 28 = Similarly, this is calculating the sum of the True Range for the past 28 days or the sum of the True Range for the past 28 days.
  6. Ultimate Oscillator Indicator = 100 * [(4 * Average 7) + (2 * Average 14) + Average 28] / (4 + 2 + 1)

Features of the Ultimate Oscillator Indicator

  • The developer, 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.
  • Even though the shortest time frame of the Ultimate Oscillator carries the most weight.
  • Also, the longest time frame of the Ultimate Oscillator is not ignored and this should reduce the number of false signals.
  • 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.

What is the Significance of Using Different Time Frames with Ultimate Oscillator?

By combining three different time periods, short-term (generally 7-period), intermediate-term (generally 14-period), and lastly, long-term (generally 28-period), the Ultimate Oscillator tends to peak when the price peaks. Just remember that the intermediate and long-term include the short-term time period. Hence, the short-term period is weighted more heavily in the Ultimate Oscillator equation.

How to Trade Ultimate Oscillator as per Larry William’s Guidelines?

There are three guidelines for generating buy or sell signals. William recommended these approaches, these are as follows:

Buy Signal

  1. The first criterion is to form a bullish divergence. This occurs if the price makes lower lows but the oscillator is at the level of higher highs and lows.
  2. The second one is that the first low in the oscillator divergence (the lower one) must be below 30 levels. This indicates the divergence began from the oversold area and is more likely to result in an upward price reversal.
  3. The third criterion is the Ultimate oscillator must rise above the divergence high. The divergence high is the high peak point between the two lows of the divergence.
Ultimate Oscillator Divergence Signals

Now, see the example above. Here, I have added the BPCL chart and set up UO on it. As you can see it has created a bullish divergence. Here, the price made lower lows but the oscillator made higher highs. Besides this, the first low of the oscillator was in the oversold zone. You can enter once the line breaks the high.

Sell Signal

  1. Firstly, there is a bearish divergence that has to form. This is once the price makes a higher high but the indicator is at a lower high.
  2. Second, the first high in the divergence (the higher one) must be above 70. This indicates the divergence begins from the overbought territory and is more likely to result in a downward price reversal.
  3. Third, the Ultimate oscillator must drop just below the divergence low. So, the divergence low is the low point between the two highs of the particular divergence.
Sell Signals in Larry William's UO

Now, check the sell signal. Here, it has created a bearish divergence. And, the price made higher highs while the indicator made lower lows. And once the 2nd low of the indicator breaks, you can enter a short sell or sell position.

Conclusions :

The Ultimate Oscillator indicator is a momentum oscillator that incorporates three different time frames. Traditional signals are derived from the bullish and bearish divergence of the 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 favor the bulls when above 50 and the bears when below 50. Same as all indicators, the Ultimate Oscillator indicator should not be used alone.

Visited 69 times, 1 visit(s) today

Author: Ankita Sarkar

Ankita is a graduate in English language and she has also done her MBA from the Calcutta University. She has a high knack in the stock markets. She is a NISM certified Research Analyst. An experienced stock market content writer Ankita is also trading successfully on her own account.

0 0 votes
Article Rating
Notify of

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Inline Feedbacks
View all comments
Would love your thoughts, please comment.x