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Ultimate Oscillator

Larry Williams designed the Ultimate Oscillator to avoid premature buy and sell signals that other oscillators suffer from. He accomplishes this by combining the weighted average of three oscillators of short (7 period), intermediate (14 period) and long term (28 period) durations, to smooth out the differences in the various durations and reduce the volatility and false buy/sell signals.

This oscillator is displayed as a line plot with values that can fluctuate between 0 and 100. Like the RSI, levels below 30 indicate an oversold condition, and levels above 70 indicate an overbought condition. However, securities can remain overbought or oversold for quite a while, so that alone does not indicate buy or sell signals.

Williams suggests the following buy/sell/close signals.

  • Buy on bullish divergence when the low of the oscillator has dipped below 30 and the oscillator then rises above the highest point reached in the span of the bullish divergence.
  • Sell on bearish divergence where the high has exceeded 50 and the oscillator then falls below the lowest point reached in the span of the bearish divergence.
  • Close long positions when the oscillator exceeds 70 (or when it exceeds 70 and then drops below 50 for confirmation).
  • Close short positions when the oscillator goes below 30 (or when it goes below 30 and then rises above 50 for confirmation).

A bullish divergence occurs when price makes a lower low that is not confirmed by a lower low in the Ultimate Oscillator. A bearish divergence occurs when price makes a higher high that is not confirmed by a higher high in the oscillator.

The following formula is used to calculate the value of an Ultimate Oscillator:


    Uo  = ( 4*Bp(1)/Tr(1) + 2*Bp(2)/Tr(2) + Bp(3)/Tr(3) ) / 7

where:
    Tl = min (L, Cp)
    Bp = C - Tl
    Tr = max (H-L, H-Cp, Cp-L)

    Bp(i) = Sum of Bp for period i (1,2,3)
    Tr(i) = Sum of TR for period i (1,2,3)

    L  = Period Low
    H  = Period High
    C  = Period Close
    Cp = Previous Period Close

Definitions:
    Tl = True Low
    Bp = Buying Pressure
    Tr = True Range

    Uo  = Ultimate Oscillator

Larry Williams documented his work in an article in Technical Analysis of Stocks & Commodities magazine in April 1985.




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