Ultimate Oscillator Explained

Introduction to the Ultimate Oscillator

The Ultimate Oscillator has been designed to estimate momentum across three-time frames. Most Oscillators look at a single timeframe, which is what makes this one “ultimate”.One of the downsides of many oscillators is that they form a strong increase in value after a big market move and then follow with bearish divergence even though the upside move continues. It happens because these oscillators are bound to only one timeframe, while ultimate oscillator incorporates three different timeframes. While this Oscillator filters out a lot of false signals, it also shows a lot fewer signals compared to others.

Calculation

The calculations involved are pretty complicated as a lot of factors are considered. Luckily, trading platforms like cTrader do all the heavy lifting for you. First, you need to calculate Buying Pressure and determine the general direction of the market. Buying Pressure is when there are more buy orders in the order book than there are sell orders.

Second, you need to compare the Buying Pressure as a relative to True Range, which tells the impact of any gains or losses. The True Range used is the same as in Average True Range.

Third, you need to create moving averages based on the three timeframes involved. The timeframes relate to Periods used to calculate the 3 distinct moving averages. Usually, the averages are for 7, 14 and 28 day periods.

Finally, you need to calculate and plot the weighted average of those three timeframes.

How to Use the Ultimate Oscillator

The Ultimate Oscillator can be used to generate buy and sell signals. Where a Sell signal could be used to exit an existing long position and a buy signal could be used to indicate the point where you should exit a short position.

Ultimate Oscillator Example
Ultimate Oscillator Entry and Exit Signal

Interpreting a Buy Signal

  1. A signal forms when bullish divergence is spotted between the price and the indicator.
  2. The low of this divergence should be below 30 level.
  3. The Oscillator rises above the high of the bullish divergence.

Interpreting a Sell Signal

  1. A signal forms when bearish divergence is spotted between market and indicator.
  2. High of this divergence should be above 70 level.
  3. Oscillator falls below the low of the divergence.

As you can see from this image. The up arrows on the Candlestick chart and Ultimate Oscillator indicate the buy signal. The down arrows indicate the sell signal. If you had of spotted this signal on EUR/USD and entered a long position at the buy signal and exited at the sell signal, that would have been approximate 90 pip profit for holding the position for just 3 and a half hours.

While this is a clear signal after the fact. It’s always recommended to get confirmation from other technical analysis indicators and never rely on a single one.

In cTrader, one cool trick you can use to help spot when the indicator line crosses over the levels is to change the colour of the level lines. You can do this when you first apply the indicator or by right-clicking on it at any time.

Ultimate Oscillator Customization
Ultimate Oscillator Customization

Origin Story

This popular indicator was designed by professional futures and commodity trader Larry Williams in 1976. Larry also created a number of other indicators including the Williams %R indicator, which is also available in the cTrader platform. Larry’s expertise in trading was passed onto his offspring as well. His son Jason, a psychiatrist has published a book called The Mental Edge in Trading. More notably, his daughter Michelle Williams and the wife of late Heath Ledger, and famous actress and Dawsons Creek star won the 1997 World Cup Championship of Futures Trading with a 1000% RoI from the initial $10,000 investment. Michelle won the award 10 years after her father did 1987, except Larry had won the competition with a RoI of 11,376% and no one has beaten him since.

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