Ultimate Oscillator

What

Developed by Larry Williams and first described in a 1985 article for Technical Analysis of Stocks and Commodities magazine, the "Ultimate" Oscillator combines a stock's price action during three different time frames into one bounded oscillator. Values range from 0 to 100 with 50 as the center line. Oversold territory exists below 30 and overbought territory extends from 70 to 100.

How

Calculate Today's "True Low (TL)". TL = the lower of today's low or yesterday's close.

Calculate Today's "Buying Pressure (BP)". BP = Today's close - Today's TL.

Calculate Today's "True Range (TR)". TR = the higher of 1.) Today's High - Today's Low; 2.) Today's High - Yesterday's Close; 3.) Yesterday's Close - Today's Low.

Calculate BPSum1, BPSum2, and BPSum3 by adding up all of the BPs for each of the three specified time frames.

Calculate TRSum1, TRSum2, and TRSum3 by adding up all of the TR's for each of the three specified time frames.

The Raw Ultimate Oscillator (RawUO) is equal to:

4 x (BPSum1 / TRSum1) + 2 x (BPSum2 / TRSum2) + (BPSum3 / TRSum3)

The Final Ultimate Oscillator is equal to:

(RawUO / (4 + 2 + 1)) x 100

When

Williams had specific criteria for a buy or sell signal. A buy signal occurs when,

• Bullish divergence between price and the oscillator is observed, meaning prices make new lows but the oscillator doesn't
• During the divergence the oscillator has fallen below 30.
• The oscillator then rises above its high during the divergence, ie. the high in between the two lows. The buy trigger is the rise through that high.

The position is closed when the oscillator rises above 70 (considered overbought), or a rise above 50 but then a fallback through 45.

A sell signal is generated conversely on a bearish divergence above level 70, to be subsequently closed out below 30 (as oversold).