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Introduction to TDI Introduction to Vertical Horizontal Filter
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The Ultimate Oscillator: Understanding and Using It for Trading

The Ultimate Oscillator is a technical analysis tool widely used by traders and investors since its development in 1976 by Larry Williams. This indicator measures the price momentum of an asset across multiple timeframes and is based on the concept of divergences. In this article, we will explore the Ultimate Oscillator, how it works, and how it can be used in trading.

What is the Ultimate Oscillator?

The Ultimate Oscillator is a momentum oscillator that combines the effects of three different timeframes to measure the momentum of an asset. The three timeframes are typically 7, 14, and 28 periods, although these can be adjusted based on the trader’s preference.

The Ultimate Oscillator calculates the weighted average of these three timeframes, with the longer-term timeframe weighted more heavily. Using this weighted average, the Ultimate Oscillator can smooth out price movements and reduce volatility compared to other oscillators relying on a single timeframe.

Ultimate Oscillator

How Does the Ultimate Oscillator Work?

The Ultimate Oscillator is based on the principle of divergences. Divergences occur when the price of an asset moves in a different direction than the momentum indicator. This can signal that the current trend is weakening, and a reversal may be imminent.

The Ultimate Oscillator generates buy and sell signals based on divergences between the asset’s price and the oscillator. When the asset’s price is making higher highs, but the oscillator is making lower highs, this is considered a bearish divergence and is a signal to sell. Conversely, when the asset’s price is making lower lows, but the oscillator is making higher lows, this is considered a bullish divergence and is a signal to buy.

How to Calculate the Ultimate Oscillator

The Ultimate Oscillator is calculated in several steps. Firstly, the True Range (TR) is calculated as the maximum of the following:

  • The current high minus the current low
  • The absolute value of the current high minus the previous close
  • The absolute value of the current low minus the previous close

Next, the Average True Range (ATR) is calculated as the simple moving average of the True Range over the desired number of periods.

Once the ATR is calculated, the Ultimate Oscillator can be calculated in three steps:

  1. Calculate the Buying Pressure (BP) for the current period, which is the close minus the minimum of the previous close or the current period’s low.
  2. Calculate the True Range (TR) for each of the three timeframes.
  3. Calculate the Ultimate Oscillator as a weighted sum of the Buying Pressure for each timeframe divided by the sum of the Total Buying Pressure for each timeframe.

Advantages of the Ultimate Oscillator

The Ultimate Oscillator has several advantages over other oscillators. Firstly, its multi-timeframe construction reduces volatility and generates fewer trade signals, making it more reliable for traders who prefer to avoid frequent trades. Secondly, its use of divergences as a signal for buy and sell orders makes it more accurate than other indicators that rely on price crossovers.

Limitations of the Ultimate Oscillator

While the Ultimate Oscillator has several advantages over other oscillators, it also has some limitations. One of the main limitations is that it can be slower to react to sudden changes in price compared to other indicators, such as the Relative Strength Index (RSI). This can result in missed trading opportunities or delayed signals.

Additionally, the Ultimate Oscillator may not work well in certain market conditions, such as during periods of low volatility or sideways markets. The indicator may generate false signals or provide little helpful information in these situations.

It is essential to understand the Ultimate Oscillator’s limitations and use it with other technical analysis tools and market knowledge to make informed trading decisions.

Using the Ultimate Oscillator in Trading

Traders can use the Ultimate Oscillator in several ways. One common method is to use it as a trend-following indicator. The asset is in an uptrend when the Ultimate Oscillator is above a certain level, such as 50. Conversely, the asset is in a downtrend when the Ultimate Oscillator is below a certain level, such as 50.

Another way to use the Ultimate Oscillator is to identify overbought and oversold conditions. When the Ultimate Oscillator reaches a level above 70, this is considered overbought, and a sell signal may be generated. Conversely, when the Ultimate Oscillator reaches a level below 30, this is considered oversold, and a buy signal may be generated.

It is important to note that the Ultimate Oscillator should not be used in isolation but should be combined with other technical analysis tools to confirm signals and avoid false positives.

Example scanners and strategies that use Ultimate Oscillator

The Ultimate Oscillator can be used in both Scanning the market and Testing Strategies. To see how exactly it can be used in these ways, we provide the following samples. The scanner searches the market for stocks using this indicator, and the strategy tests buying and selling rules built around this indicator.

"Ultimate Oscillator > 50 #bullish" scanner by TrendSpider
charts.trendspider.com
“Ultimate Oscillator > 50 #bullish” scanner by TrendSpider
"Ultimate Oscillator Long Strategy" strategy by TrendSpider
charts.trendspider.com
“Ultimate Oscillator Long Strategy” strategy by TrendSpider

The Bottom Line

The Ultimate Oscillator is a powerful tool for traders and investors looking to identify price momentum and generate buy and sell signals. Its multi-timeframe construction and use of divergences make it more reliable than other oscillators that rely on a single timeframe. However, like any technical analysis tool, traders should use it with other indicators and analyses to confirm signals and avoid false positives. The Ultimate Oscillator can be a valuable addition to a trader’s toolkit with proper usage and research.

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Introduction to TDI Introduction to Vertical Horizontal Filter