The Secret Mindset
The Ultimate Oscillator, developed by Larry Williams, is a momentum indicator that combines short-term, intermediate-term, and long-term price action. It attempts to give overbought and oversold signals, and confirmations of price action, as well as divergences that might warn of future price reversals. The oscillator generates fewer divergence signals than other oscillators because of its multi-timeframe construction. To generate a buy or sell signal, the oscillator requires a bullish or bearish divergence formation, in addition to overbought or oversold readings, followed by a confirmation of reversal. It can be applied to intraday, daily, weekly, or monthly charts, and its sensitivity can be adjusted by changing the timeframe settings.
What is the Ultimate Oscillator?
The Problems with Other Oscillators
The ultimate oscillator is a momentum indicator that was developed by Larry Williams to capture momentum across three different timeframes. Other momentum oscillators have a fundamental flaw in that they only surge at the beginning of a strong advance and form a bearish divergence as the advance continues. This is because they are stuck with one timeframe. The ultimate oscillator aims to fix this flaw by incorporating longer timeframes into its formula.
How the Ultimate Oscillator Works
The Ultimate Oscillator Formula
The ultimate oscillator combines short-term, intermediate-term, and long-term price action into one oscillator. The default settings for the ultimate oscillator is 7,14,28, which means it calculates buying pressure to determine the overall direction of price action, measures buying pressure relative to the true range, creates averages based on the three timeframes involved, and creates a weighted average of the three averages. By combining three separate time periods, the ultimate oscillator tends to peak when price peaks.
Interpreting the Ultimate Oscillator
The Ultimate Oscillator Movements
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. By smoothing out the indicator’s movements and providing a more reliable indicator of momentum, the ultimate oscillator generates fewer false divergences.
Trading with the Ultimate Oscillator
The Buy and Sell Signals
To generate a buy signal with the ultimate oscillator, a bullish divergence must form, and the first low in the divergence must be below 30. Third, the ultimate oscillator must rise above the divergence high. On the other hand, to generate a sell signal, a bearish divergence must form, and the first high in the divergence must be above 70. Third, the ultimate oscillator must drop below the divergence low.
Alternative Entries
In some cases, it’s not necessary to wait for the oscillator to increase above the high of the bullish divergence or move below the low of the bearish divergence. An alternative entry to consider is a move above the 50 level. Technical analysis requires a little flexibility, and it’s up to each trader to decide which entry they prefer.
Important Observations Regarding Timeframes
The ultimate oscillator can be used on intraday, daily, weekly, or even monthly charts. It’s sometimes necessary to adjust its settings to generate overbought or oversold readings, which are part of the buy and sell signals. If stocks or securities don’t generate overbought or oversold readings, it’s recommended to increase sensitivity with shorter timeframes.
Conclusion
In conclusion, the ultimate oscillator is an effective momentum indicator that captures momentum across three different timeframes. By incorporating longer timeframes into its formula, the ultimate oscillator generates fewer false divergences compared to other oscillators. Investors and traders can benefit from applying this indicator in their technical analysis to confirm trends and generate buying and selling signals.
