Ultimate Oscillator
Many traditional momentum oscillators rely on a single time frame, often leading to overly optimistic readings at the start of a strong uptrend. This can result in premature bearish divergences and overbought signals, even as the trend continues. To address this issue, Larry Williams developed the Ultimate Oscillator (UO), which incorporates three timeframes—7, 14, and 28 periods—to account for short-, medium-, and long-term market movements.
Buy Signal Criteria:
A bullish divergence forms when the price makes a lower low, but the oscillator does not confirm this with a new low. The following conditions must also be met:
- During the bullish divergence, the Ultimate Oscillator falls below 30 (indicating oversold conditions).
- The oscillator subsequently rises above the highest level reached during the divergence period, confirming the buying opportunity.
Sell Signal Criteria:
A bearish divergence occurs when the price makes a higher high, but the oscillator fails to follow suit. The key requirements are:
- During the bearish divergence, the Ultimate Oscillator rises above 70 (indicating overbought conditions).
- The oscillator then falls below the lowest point reached during the divergence, confirming the sell signal.
Ultimate Oscillator Formula
The Ultimate Oscillator is calculated using Buying Pressure (BP) and True Range (TR) across multiple timeframes:
- Buying Pressure (BP) = Current Close – Minimum(Current Low or Previous Close)
- True Range (TR) = Maximum(Current High or Previous Close) – Minimum(Current Low or Previous Close)
Next, three averages are computed:
- Average7 = Sum of BP (past 7 days) / Sum of TR (past 7 days)
- Average14 = Sum of BP (past 14 days) / Sum of TR (past 14 days)
- Average28 = Sum of BP (past 28 days) / Sum of TR (past 28 days)
The Ultimate Oscillator value is then determined using a weighted sum of these averages:
