Ultimate Oscillator was created by Larry Williams. He described it in "Technical Analysis of Stocks and Commodities" magazine in 1985. Ultimate oscillator combines the prices of 3 different periods into one single oscillator.
Ultimate oscillator consists of 3 moving averages – short-term, middle-term and long-term. These moving averages are mainly set to 7-14-28 time periods. As you can see, every next Moving average is a double of the previous one.
Ultimate oscillator formula:
True Low = MIN (Low n; Close n-1)
Buying Presure = Close n – True Low n
True Range = MAX [(High n – Low n); (High n – Close n-1); (Close n-1 – Low n)]
Low n = Today's Low
High n = Today's High
Close n-1 = Yesterday's Close
Consequently we calculate the BP (Buying pressure) for every chosen period (in this case 7-14-28 periods). By adding we get the sum BP1, sumBP2, sumBP3 values
True Range for every of the 3 periods: sumTR1, sumTR2 and sumTR3.
Raw Ultimate Oscillator = 4*(SumBP1/SumTR1) + 2*(SumBP2/SumTR2) + 1*(SumBP3/SumTR3)
Ultimate Oscillator = [(Raw Ultimate Oscillator / (4+2+1)] * 100
The oscillator values move in the range of 0 to 100. They mostly oscillates around the neutral value 50 points.
How to use the Ultimate oscillator:
- When the UO crosses 70 points upwards, the market is considered to be overbought. It is cosidered to be oversold, should it cross 30 points downwards.
- Next possibility of using it is to trade the Neutral line crossings - upwards or downwards. But such crossings are very frequent.
- Its probably most interesting use described Larry Williams himself. He pointed up the positive and negative divergences. If the price asset makes new High, while Ultimate Oscillator creates just Lower High, it predicts trend reversal comming soon. Vice versa, if the price makes new Low, but UO does not confirm it, the trend is about to change upwards. Besides, these trend reversals are very significant.