## 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.

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)

## Ultimate Oscillator (UO)

### Description

Many momentum oscillators use one time frame which causes them to turn very positive at the beginning of a major advance and then form a bearish divergence and overbought readings while the advance continues. The Ultimate Oscillator, developed by Larry Williams, attempts to correct this by using three different time periods (7, 14, and 28) to represent short, medium, and long-term market trends.

### How this indicator works

**Buy Signal:**

- A bullish divergence occurs. This is when the security’s price makes a lower low that is not confirmed by a lower low in the Oscillator.
- During the bullish divergence, the low of the Oscillator falls below 30.
- The Oscillator then rises above the highest point reached during the span of the bullish divergence.

**Sell signal:**

- A bearish divergence occurs. This is when the security’s price makes a higher high that is not confirmed by a higher high in the Oscillator.
- During the bearish divergence, the high of the Oscillator rises above 70.
- The Oscillator then falls below the lowest point reached during the span of the bearish divergence.

### Calculation

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)

Average7 = Sum of BP for the past 7 days / Sum of TR for the past 7 days

Average14 = Sum of BP for the past 14 days / Sum of TR for the past 14 days

Average28 = Sum of BP for the past 28 days / Sum of TR for the past 28 days

Ultimate Oscillator = 100 * [(4 * Average7) + (2 * Average14) + Average28] / (4 + 2 + 1)

#### Related Indicators

ATR is the average of true ranges over the specified period. ATR measures volatility, taking into account any gaps in the price movement.

The RSI, developed by J. Welles Wilder, is a momentum oscillator that measures the speed and change of price movements.

Technical analysis focuses on market action — specifically, volume and price. Technical analysis is only one approach to analyzing stocks. When considering which stocks to buy or sell, you should use the approach that you’re most comfortable with. As with all your investments, you must make your own determination as to whether an investment in any particular security or securities is right for you based on your investment objectives, risk tolerance, and financial situation. Past performance is no guarantee of future results.

## 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 ^ <7>\text ^ <7>\text > \\ &\text ^ <14>\text ^ <14>\text > \\ &\text ^ <28>\text ^ <28>\text > \\ \end

## How to Calculate the Ultimate Oscillator

- 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.
- 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.
- 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.
- 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.