Ultimate Oscillator

Ultimate Oscillator

Key takeaways
* The Ultimate Oscillator measures momentum across three timeframes (7, 14, 28 periods) using a weighted average to reduce false signals.
* Values range from 0 to 100. Readings below 30 are commonly interpreted as oversold; above 70 as overbought.
* Trade signals are primarily generated by divergences using a three-step method to confirm entries.
* Use the indicator with other analysis (price action, trend, additional indicators) — it should not be used alone.

What it is
The Ultimate Oscillator is a momentum oscillator developed to combine short-, medium- and long-term momentum into a single indicator. By weighting three lookback periods (shortest period receives the most weight), it aims to smooth readings and reduce false divergences common to single-timeframe oscillators.

Formula
UO = [ (A7 × 4) + (A14 × 2) + (A28 × 1) ] / (4 + 2 + 1) × 100

where:
* A7 = (sum of Buying Pressure over 7 periods) / (sum of True Range over 7 periods)
* A14 = same ratio over 14 periods
* A28 = same ratio over 28 periods

Definitions:
* Buying Pressure (BP) = Close − min(Low, Prior Close)
* True Range (TR) = max(High, Prior Close) − min(Low, Prior Close)

How to calculate (step‑by‑step)
1. For each period compute BP and TR:
* BP = Close − min(Low, Prior Close)
* TR = max(High, Prior Close) − min(Low, Prior Close)
2. Sum BP and TR separately for the most recent 7, 14, and 28 periods.
3. Compute A7 = BPsum7 / TRsum7, A14 = BPsum14 / TRsum14, A28 = BPsum28 / TRsum28.
4. Apply the weighted formula: weight A7 by 4, A14 by 2, A28 by 1. Divide by total weights (7) and multiply by 100 to get the Ultimate Oscillator value.

Interpreting the indicator
* Range: 0–100. Conventional thresholds: <30 = oversold, >70 = overbought.
* Primary trading technique: divergence-based signals using a three-step confirmation.

Bullish divergence (buy) — three-step confirmation:
1. Price makes a lower low while the oscillator makes a higher low (divergence).
2. The lower low of the divergence (the first low) must be below 30 (started from oversold territory).
3. The oscillator must rise above the divergence high (the peak between the two lows) to confirm the buy.

Bearish divergence (sell) — three-step confirmation:
1. Price makes a higher high while the oscillator makes a lower high.
2. The higher high of the divergence (the first high) must be above 70 (started from overbought territory).
3. The oscillator must fall below the divergence low (the trough between the two highs) to confirm the sell.

Comparison with the Stochastic Oscillator
* Ultimate Oscillator: combines three lookback periods (multi-timeframe weighting); usually no signal line; divergence-based signals follow a specific three-step rule.
* Stochastic Oscillator: typically uses a single lookback period and often includes a signal line; signals and sensitivity differ because of the calculation method.
Both can generate divergence signals, but the frequency and reliability differ due to their underlying formulas.

Limitations and best practices
* The three-step divergence method reduces false signals but will miss some valid reversals and may produce late entries after much of the move has occurred.
* Divergences do not occur at every reversal; reversals can happen without divergence.
* As with any indicator, it should not be used in isolation. Combine with trend analysis, price action, volume, or other indicators and adopt risk management (stop-loss, position sizing).
* Understand the math and behavior on historical data or paper trades before applying in live trading.

Conclusion
The Ultimate Oscillator is a momentum tool that blends three timeframes to smooth readings and filter false divergences. It provides clearer divergence signals for traders who prefer multi-timeframe momentum confirmation, but it sacrifices some timeliness and will miss some opportunities. Use it as one element of a broader trading approach.