Ultimate Oscillator: Definition, Formula, and Strategies (2024)

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. The indicator has less volatility and fewer trade signals compared to other oscillators that rely on a single timeframe because it uses the weighted average of three timeframes.

Buy and sell signals are generated following divergences. The Ultimate Oscillator generates fewer divergence signals than other oscillators due to its multi-timeframe construction.

Ultimate Oscillator Formula

$\begin{aligned} &\text{UO} = \left [ \frac{ ( \text{A}_7 \times 4 ) + ( \text{A}_{14} \times 2 ) + \text{A}_{28} }{ 4 + 2 + 1 } \right ] \times 100 \\ &\textbf{where:} \\ &\text{UO} = \text{Ultimate Oscillator} \\ &\text{A} = \text{Average} \\ &\text{Buying Pressure (BP)} = \text{Close} - \text{Min} ( \text{Low}, \text{PC} ) \\ &\text{PC} = \text{Prior Close} \\ &\text{True Range (TR) } = \text{Max} ( \text{High}, \text{Prior Close} ) - \\ &\phantom {\text{True Range (TR) } =} \text{Min} ( \text{Low}, \text{Prior Close} ) \\ &\text{Average}_7 = \frac{ \sum_{p=1}^{7} \text {BP} }{ \sum_{p=1}^{7} \text {TR} } \\ &\text{Average}_{14} = \frac{ \sum_{p=1}^{14} \text {BP} }{ \sum_{p=1}^{14} \text {TR} } \\ &\text{Average}_{28} = \frac{ \sum_{p=1}^{28} \text {BP} }{ \sum_{p=1}^{28} \text {TR} } \\ \end{aligned}$​UO=[4+2+1(A7​×4)+(A14​×2)+A28​​]×100where:UO=UltimateOscillatorA=AverageBuyingPressure(BP)=Close−Min(Low,PC)PC=PriorCloseTrueRange(TR)=Max(High,PriorClose)−TrueRange(TR)=Min(Low,PriorClose)Average7​=∑p=17​TR∑p=17​BP​Average14​=∑p=114​TR∑p=114​BP​Average28​=∑p=128​TR∑p=128​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'll 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'll be summed up over the last seven, 14, and 28 periods to create TR Sum.
3. Calculate Average seven, 14, and 28 using the BP and TR Sums calculations from steps one and two. The Average seven BP Sum is the calculated BP values added together for the last seven periods.
4. Calculate the Ultimate Oscillator using the Average seven, 14, and 28 values. Average seven has a weight of four, Average 14 has a weight of two, and Average 28 has a weight of one. Sum the weights in the denominator. The sum is seven, or 4+2+1 in this case. Multiply by 100 when other calculations are complete.

What Does the Ultimate Oscillator Tell You?

The Ultimate Oscillatoris a range-bound indicator with avalue that fluctuates between 0 and 100. Levels below 30 are deemed to be oversold and levels above 70 are deemed to be overbought, similar to the Relative Strength Index(RSI). Tradingsignals are generated when the price moves in the opposite direction asthe indicator and they're based on a three-step method.

Larry Williams developed theUltimate 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 the oscillator surges when the price surges. The oscillator tends to fall, forming a divergence even though the price may still be trending strongly, even if the price continues to rise.

Williams recommended a three-step approach for the indicator to generate a buy signal:

• A bullish divergence must form. The price makes a lower low but the indicator is at a higher low.
• The first low in the divergence (the lower one) must have been below 30 because the divergence started from oversold territory and is more likely to result in an upside price reversal.
• 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:

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

The Ultimate Oscillator vs. the 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, although one could be added. The Stochastic does. Both indicators generate trade signals based on divergence but the signals will be different due to the different calculations.

Limitations of Using the Ultimate Oscillator

The three-step trading method for the indicator may help eliminate some poor trades but it also eliminates many good ones. Divergence isn't present at all price reversal points and a reversal won't always occur from overbought or oversold territory. Waiting for the oscillator to move above the divergence high (bullish divergence) or below the divergence low (bearish divergence) could mean a 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.

The Bottom Line

The Ultimate Oscillator is a technical indicator that focuses on three timeframes: seven, 14, and 28 periods. It has less volatility and fewer trade signals because it doesn’t rely on a single timeframe. It uses the weighted average of all three. The 28 period carries the least weight.

You’ll want to be very sure that you understand the calculation and math before you wade in and use this or any other indicator. Consider touching base with a professional if you’re even a little unsure.

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