Ultimate Oscillator

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Ultimate Oscillator

What is the Ultimate Oscillator?

The Ultimate Oscillator is a technical indicator that was developed by Larry Williams in 1976 to measure the price momentum of an asset across multiple timeframes. By using the weighted average of three different timeframes the indicator has less volatility and fewer trade signals compared to other oscillators that rely on a single timeframe. Buy and sell signals are generated following divergences. The Ultimately Oscillator generates fewer divergence signals than other oscillators due to its multi-timeframe construction.

Key Takeaways

  • The indicator uses three timeframes in its calculation: seven, 14, and 28 periods.
  • The shorter timeframe has the most weight in the calculation, while the longer timeframe has the least weight.
  • Buy signals occur when there is bullish divergence, the divergence low is below 30 on the indicator, and the oscillator then rises above the divergence high.
  • A sell signal occurs when there is bearish divergence, the divergence high is above 70, and the oscillator then falls below the divergence low.

The Formula for the Ultimate Oscillator Is:

UO = [ ( A 7 × 4 ) + ( A 1 4 × 2 ) + A 2 8 4 + 2 + 1 ] × 1 0 0 where: UO = Ultimate Oscillator A = Average Buying Pressure (BP) = Close − Min ( Low , PC ) PC = Prior Close True Range (TR) = Max ( High , Prior Close ) − True Range (TR) = Min ( Low , Prior Close ) Average 7 = ∑ p = 1 7 BP ∑ p = 1 7 TR Average 1 4 = ∑ p = 1 1 4 BP ∑ p = 1 1 4 TR Average 2 8 = ∑ p = 1 2 8 BP ∑ p = 1 2 8 TR \begin &\text = \left [ \frac< ( \text_7 \times 4 ) + ( \text_ <14>\times 2 ) + \text_ <28>> < 4 + 2 + 1 >\right ] \times 100 \\ &\textbf \\ &\text = \text \\ &\text = \text \\ &\text = \text – \text ( \text, \text ) \\ &\text = \text \\ &\text = \text ( \text, \text ) – \\ &\phantom <\text=> \text ( \text, \text ) \\ &\text_7 = \frac< \sum_^ <7>\text >< \sum_^ <7>\text > \\ &\text_ <14>= \frac< \sum_^ <14>\text >< \sum_^ <14>\text > \\ &\text_ <28>= \frac< \sum_^ <28>\text >< \sum_^ <28>\text > \\ \end ​ UO = [ 4 + 2 + 1 ( A 7 ​ × 4 ) + ( A 1 4 ​ × 2 ) + A 2 8 ​ ​ ] × 1 0 0 where: UO = Ultimate Oscillator A = Average Buying Pressure (BP) = Close − Min ( Low , PC ) PC = Prior Close True Range (TR) = Max ( High , Prior Close ) − True Range (TR) = Min ( Low , Prior Close ) Average 7 ​ = ∑ p = 1 7 ​ TR ∑ p = 1 7 ​ BP ​ Average 1 4 ​ = ∑ p = 1 1 4 ​ TR ∑ p = 1 1 4 ​ BP ​ Average 2 8 ​ = ∑ p = 1 2 8 ​ TR ∑ p = 1 2 8 ​ BP ​ ​

How to Calculate the Ultimate Oscillator

  1. Calculate the Buying Pressure (BP) which is the close price of the period less the low of that period or prior close, whichever is lower. Record these values for each period as they will be summed up over the last seven, 14, and 28 periods to create BP Sum.
  2. Calculate the True Range (TR) which is the current period’s high or the prior close, whichever is higher, minus the lowest value of the current period’s low or the prior close. Record these values for each period as they will be summed up over the last seven, 14, and 28 periods to create TR Sum.
  3. Calculate Average7, 14, and 28 using the BP and TR Sums calculations from steps one and two. For example, the Average7 BP Sum is the calculated BP values added together for the last seven periods.
  4. Calculate the Ultimate Oscillator using the Average7, 14, and 28 values. Average7 has a weight of four, Average14 has a weight of two, and Average28 has a weight of one. Sum the weights in the denominator (in this case, the sum is seven, or 4+2+1). Multiply by 100 when other calculations are complete.

What Does the Ultimate Oscillator Tell You?

The Ultimate Oscillator is a range-bound indicator with a value that fluctuates between 0 and 100. Similar to the Relative Strength Index (RSI), levels below 30 are deemed to be oversold, and levels above 70 are deemed to be overbought. Trading signals are generated when the price moves in the opposite direction as the indicator, and are based on a three-step method.

Larry Williams developed the Ultimate Oscillator in 1976 and published it in Stocks & Commodities Magazine in 1985. With many momentum oscillators correlating too heavily to near-term price movements, Williams developed the Ultimate Oscillator to incorporate multiple timeframes to smooth out the indicator’s movements and provide a more reliable indicator of momentum, with fewer false divergences.

False divergences are common in oscillators that only use one timeframe, because when the price surges the oscillator surges. Even if the price continues to rise the oscillator tends to fall forming a divergence even though the price may still be trending strongly.

In order for the indicator to generate a buy signal, Williams recommended a three-step approach.

  • First, a bullish divergence must form. This is when the price makes a lower low but the indicator is at a higher low.
  • Second, the first low in the divergence (the lower one) must have been below 30. This means the divergence started from oversold territory and is more likely to result in an upside price reversal.
  • Third, the Ultimate oscillator must rise above the divergence high. The divergence high is the high point between the two lows of the divergence.

Williams created the same three-step method for sell signals.

  • First, a bearish divergence must form. This is when the price makes a higher high but the indicator is at a lower high.
  • Second, the first high in the divergence (the higher one) must be above 70. This means the divergence started from overbought territory and is more likely to result in a downside price reversal.
  • Third, the Ultimate oscillator must drop below the divergence low. The divergence low is the low point between the two highs of the divergence.

The Difference Between the Ultimate Oscillator and Stochastic Oscillator

The Ultimate Oscillator has three lookback periods or timeframes. The Stochastic Oscillator has only one. The Ultimate Oscillator doesn’t typically include a signal line (one could be added), while the Stochastic does. While both indicators generate trade signals based on divergence, the signals will be different due to the different calculations. Also, the Ultimate Oscillator uses a three-step method for trading divergence.

Limitations of Using the Ultimate Oscillator

While the three-step trading method for the indicator may help eliminate some poor trades, it also eliminates many good ones. Divergence is not present at all price reversal points. Also, a reversal won’t always occur from overbought or oversold territory. Also, waiting for the oscillator to move above the divergence high (bullish divergence) or below the divergence low (bearish divergence) could mean poor entry point as the price may have already run significantly in the reversal direction.

As with all indicators, the Ultimate Oscillator shouldn’t be used in isolation, but rather as part of a complete trading plan. Such a plan will typically include other forms of analysis such as price analysis, other technical indicators, and/or fundamental analysis.

Ultimate Oscillator

Table of Contents

Ultimate Oscillator

Introduction

Developed by Larry Williams in 1976 and featured in Stocks & Commodities Magazine in 1985, the Ultimate Oscillator is a momentum oscillator designed to capture momentum across three different timeframes. The multiple timeframe objective seeks to avoid the pitfalls of other oscillators. Many momentum oscillators surge at the beginning of a strong advance, only to form a bearish divergence as the advance continues. This is because they are stuck with one timeframe. The Ultimate Oscillator attempts to correct this fault by incorporating longer timeframes into the basic formula. Williams identified a buy signal a based on a bullish divergence and a sell signal based on a bearish divergence.

Calculation

There are quite a few steps involved in the Ultimate Oscillator (UO) calculation. This example is based on the default settings (7,14,28). First, calculate Buying Pressure (BP) to determine the overall direction of price action. Second, measure Buying Pressure relative to the True Range (TR). This tells us the true magnitude of a gain or loss. Third, create averages based on the three timeframes involved (7,14,28). Fourth, create a weighted average of the three averages.

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Buying Pressure (BP) measures the level of the current close relative to the current low or prior close, whichever is the lowest. True Range (TR) measures the price range from the current high or prior close (whichever is highest) to the current low or prior close (whichever is lowest). Both Buying Pressure and True Range incorporate the prior close to account for possible gaps from one period to the next. Buying Pressure is then shown relative to the True Range by dividing the X-period sum of BP by the X-period Sum of True Range. Averages are created for 7, 14 and 28 periods. These numbers correspond with the default parameters. A weighted mean is then created by multiplying the shortest Average by 4, the middle Average by 2 and the longest Average by 1. These weighted amounts are then summed and divided by the sum of the weightings (4+2+1).

Click here for an Ultimate Oscillator calculation in an Excel Spreadsheet.

Interpretation

Buying Pressure and its relationship to the True Range forms the base for the Ultimate Oscillator. 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 will reflect the true magnitude of the advance, and hence, buying pressure. The Ultimate Oscillator rises when Buying Pressure is strong and falls when Buying Pressure is weak.

The Ultimate Oscillator measures momentum for three distinct timeframes. Notice that the second timeframe is double that of the first, and the third timeframe is double that of the second. Even though the shortest timeframe carries the most weight, the longest timeframe is not ignored, which should reduce the number of false divergences. This is important because the basic buy signal is based on a bullish divergence and the basic sell signal is based on a bearish divergence.

Buy Signal

There are three steps to a buy signal. First, a bullish divergence forms between the indicator and security price. This means the Ultimate Oscillator forms a higher low as price forges a lower low. The higher low in the oscillator shows less downside momentum. Second, the low of the bullish divergence should be below 30. This is to ensure that prices are somewhat oversold or at a relative extremity. Third, the oscillator rises above the high of the bullish divergence.

Best Buy (BBY) is shown with the Ultimate Oscillator (7,14,28) becoming oversold in late June and forming a large bullish divergence with a higher low in late August. Technically, the indicator did not confirm the divergence until mid-September. Technical analysis, however, requires a little flexibility. Chartists could have used the move above 50 as a trigger for the Ultimate Oscillator instead. This centerline acts as a bull-bear threshold for the indicator. The cup is half full (bullish bias) when above and half empty (bearish bias) when below. Also notice that the stock broke the June trend line and surged above short-term resistance in early September for further confirmation.

The chart below shows American Eagle (AEO) with a smaller bullish divergence signal. The Ultimate Oscillator moved to oversold levels (

Additional Resources

Stocks & Commodities Magazine Articles

The Ultimate Oscillator by Larry Williams
Jul 1985 – Stocks & Commodities V. 3:4 (140-141)

I Really Trade

I developed this trading and investing indicator in 1976. All oscillators essentially tell us the same thing; how price has performed over a specific time. This indicator is unique in that it combines three time periods, short, intermediate and long-term into one oscillator. Thus it has fewer false divergences and signals than a traditional one-time period oscillator. It is a stock or futures trading indicator that can be used in any time frame: short term trading, day trading, swing trading, long term trading, investing, intra-day trading, investing, etc – any trading time frame for futres, stocks, or commodities.

Let’s start at the beginning.

There is nothing more intriguing to the beginning commodity or stock trader than the discovery of oscillators. At first, oscillators appear to be the perfect stock or commodity trading tool because so often they give excellent buy and sell signals. But, the more you use oscillators, the more you realize that oscillators give an equal number of false signals.

Since 1900, stock and commodity traders have tried to tame their oscillators in order to develop a new approach that does not give false signals or false divergences yet provides an insight into the market that no other tool can.

An oscillator actually measures the momentum of data, whether it is price, volume, or open interest. An oscillator will help show the speed at which the information is changing. Thus, it can also define over-bought or over-sold areas.

The pioneer in oscillator work was Owen Taylor who in the 1920’s presented oscillator work based on 7-day data. Taylor looked at price today versus a 7-day moving average of price or a 7-day moving average of advancing and declining stocks over the last seven days.

In the 1940’s Woods and Vignolia started their interesting approach to the market measuring volume in what is now known as On Balance Volume. These two gentlemen, based in San Francisco, started running a cumulative positive-negative volume flow that was later popularized by Joe Granville. Woods and Vignolia also did a tremendous amount of oscillator work using 20 to 40-day measurements of days that had up volume versus days that had down volume.

Slightly earlier than this, the Lowry Reports out of Florida were busy running moving averages on advancing and declining stock or advancing and declining volume under their heading of “buying pressure” and “selling pressure”.

In the 1950’s not too much was done in the way of oscillators. It wasn’t until 1960 that Security Market Research, a service out of Denver, Colorado, showed an oscillator based on the difference between two moving averages that the oscillator number crunchers started getting busy again.

The ability to construct oscillators improved substantially with the advent of the computer and especially small personal computers. That allowed the introduction of a new approach to oscillators going beyond a simple moving average. The new trading crowd had been to college, had studied their math, and was suddenly flipping around words like exponentials, supersonic averages, front-end-weighted moving averages, lagged moving averages, rolling numbers, etc.

This all reached its zenith in what has become one of the most widely known oscillators constructed by Wells Wilder: the Relative Strength Index. In fact the index is not a measure of relative strength because “relative” means “in relation to something.” What Wilder created was an oscillator based on a 14 day time cycle, an oscillator that has a decent record of giving buy and sell signals in the market.

The Oscillator Opportunity

The reason people have continued dabbling with oscillators is that they have the capability to give indications in advance of market turning points. I wrote an article in 1973 for what was then known as Commodities magazine (now Futures Magazine) that showed an approach to oscillators in the pork belly and soybean oil market that actually led major tops and bottoms in the market.

The trouble for most oscillator workers was, and has continued to be, that while frequently oscillators lead, sometimes they lead far too early and instead of buying a bottom, you are buying falling daggers and getting sliced up. Even the best oscillators consistently give premature buy and sell signals. I believe my “Ultimate Oscillator” corrects this.

The Oscillator Problem

The largest failure of oscillators is their inability to deal correctly with the time cycles involved. Let me explain that a bit. If you use a 7-day average, as Taylor did in the 1920’s, you will quickly find that the maximum move you are going to catch is one that lasts somewhere in the area of 3 1/2 to 9 days. In other words, the type of moves the oscillator catches cannot, by definition, be much longer than the time period measured in the oscillator.

If you go out to a longer term approach?something that measures what is taking place in sixty or seventy days?the problem is that by the time your oscillator’s identified the trend, the trend then reverses. Markets are so quick that anything using 30, 50, or 80 days does not respond quickly enough to get you in and out with profit.

One thing I noticed through the years is that the traditional short term oscillators, such as those featured in most trading and investing books, will turn very positive at the start of a major upmove in the market but quickly show divergence and overbought readings, causing most traders to sell short somewhere after the first leg of a bull market. They then take a short position on the market and hold that short position in one form or another, actual outright short or afraid to purchase, for the next three or four legs of the bull market. That can be a costly experience. This happens because the time measurements in the oscillators they are following are too short-term in nature to catch a major move.

All About the Ultimate Oscillator

What is really needed is an oscillator that expands as the market gets stronger or weaker. As an example, if the market shows a tremendous amount of strength your oscillator would expand the time base, thereby not allowing the short term fluctuation to influence the fact that the market has turned the corner on a long-term basis.

To capture this effect, I have included in the ultimate oscillator three different time cycles in the marketplace. Additionally, instead of measuring price, I believe it is more profitable to measure the amount of accumulation and distribution taking place in the market.

It Is About Time

Time is one of the most critical elements in creating your oscillator. I have chosen three different time periods for the oscillator, three time cycles that generally have been the most dominant time cycles in the market. I use one which is based on 7, 14 and 28-day measurements of accumulation and distribution. I have found that those time periods are generally the ones that give the moves most traders wish to trade.

The Great Equalizer

One needs to equalize these time periods. To do this, we will multiply the data we get from the seven day time series by 4 and multiply the data arrived at from the 14 day time period by 2, thus having equal values for all three cycles.

Measuring Accumulation and Distribution

I have tried to measure accumulation and distribution in commodities in terms of volume, in terms of open interest and in terms of net change, in terms of volatility factors, in terms of tick by tick trade, you name it. The bottom line of all that effort is that what appears to be the easiest way of measuring accumulation and distribution is to simply define selling pressure as the price movement from the high to the close each day while taking the buying measurement to be the difference between the low and the close.

For this study, one must also incorporate the previous day’s closing price if the following day’s high is lower than the previous day’s closing price or the following day’s low is higher than the closing price. In short, then one must fill in the gaps that occur between yesterday’s price and today’s high or low. As an example, if yesterday’s closing price was 60 and this morning’s low was 61 with a close today of 63, the measure of buying would not be 63 minus 61 but 63 minus 60 or 3 cents of buying.

Constructing the Oscillator

You need to set up several columns. First, I always post the high, low, and close each day. In one column to the right I have the buying units for that day, defined as the close minus the true low. I then skip a couple of columns and have another column to record the total activity of the day. We would define that by subtracting the true high from the true low. We have then created on a daily basis the amount of buying for the day and the total amount of activity (buying and selling) for the day.

I next run a 7-day sum of the total amount of buying for the last seven days. I also run a 14-day sum of the buying figure and finally a 28-day sum. I then do the same thing with the total activity or range figure by running 7, 14, and 28-day sums of the range.

Now the fun begins. I then divide the 7-day figure of the range into the 7-day figure of buying, giving the percent of buying in that time period. I next divide the total range of the 14 days into the buying of the 14 days to give me a percent of buying for the 14 days. I follow up with the third step of dividing the total range for the last 28 days into the total buying for the 28 days, giving me a percentage of buying during that time period. Finally I multiply the 7 day figure by 4 and the 14-day figure by 2 to equalize the impact that each time period will have.

If you have followed along with me so far, you now realize that I add the final 7, 14, and 28-day figures into one master percentage figure that reflects the buying pressures and, concomitantly, the selling, of three time periods over the last 28 days, all equalized to give each time period an equal impact. This data is then plotted as a percentage change underneath price action resulting in the Ultimate Oscillator.

Rules for Using the Ultimate Oscillator

There will be two requirements for a buy and sell signal to activate a market position using the oscillator. Our first demand is that we have a price divergence from the oscillator. In the case of a buy we must have had a lower low in price that was not matched by a lower low in the oscillator. In the case of a sell we must have had a higher high in price that was not matched by the oscillator. Secondly, await a trend break in the Ultimate Oscillator to produce the actual signal.

As you can see in our weekly chart of Gold below, for example A there is no divergence between the Ultimate Oscillator (the line in blue) and price. However, in example B, there is divergence between the Ultimate Oscillator and price, i.e. price increased while the oscillator decreased.

Ultimate Oscillator Gold Weekly Bars

Once the divergence for a sell signal has occurred, note the low in the oscillator prior to the peak that set up the divergence. Once the Ultimate Oscillator falls below this low, you can take a short position in the market. The failure in the oscillator is your indication that it is time to sell. Frequently you will see this taking place right at or very close to the actual high in price.

Ultimate Oscillator Gold Daily Bars

After the divergence for a buy signal has occurred note the high in the oscillator prior to the low that set up the divergence. Once the Ultimate Oscillator rises above this peak you take a long position. The trend break in the oscillator is your indication that buyers now dominate and an up move will begin. Again, note how close this trend break to the upside occurs in the daily price lows.

Example of Ultimate Oscillator on Gold Intra-Day 15 Minute Bars

Once you have entered a position, you will exit in one of the three following manners:

If Short:
1. Exit on an opposite signal occurring. You would also be reversing to the long side.
2. Go flat, not reversing, when the Ultimate Oscillator falls to 30% or less. This signal will be early at times but its usage will greatly increase your percent of winners and reduce your number of sleepless nights.
3. Once short, close our your position by going flat any time the index rises above 65%,. This is your initial stop loss.

If Long:
1. Exit on an opposite signal occurring. You would also be reversing to the short side.
2. Go flat, not reversing, when the Ultimate Oscillator rises above 70%. Comments in #2 above apply.
3. Once long, close out your position going flat any time the index falls below 45% after having risen
above 50%. This is your stop loss.

All divergence signals must first have seen the index rise above 50% for sell and fallen below 30% for a buy. Divergent patterns that occur without the index first going to these levels are not to be acted upon.

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