Ultimate oscillator is a technical indicator invented by Larry Williams. Ultimate oscillator uses the weighted average of three different time periods to reduce the volatility and false transaction signals that are associated with many other indicators that mainly rely on a single time period.
The Ultimate Oscillator is actually a technical analysis oscillator on a notion of buying or selling pressure represented by where a day’s closing price falls within the day’s true range.
The calculation starts with buying pressure. Buying pressure is the amount which is the amount by which the close is above the true low on a given day. The true low is the lesser of the given day’s trading low and the previous close.
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).