Ultimate Oscillator Binary Options Strategy

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Ultimate Oscillator

What is the Ultimate Oscillator?

The Ultimate Oscillator is a technical indicator that was developed by Larry Williams in 1976 to measure the price momentum of an asset across multiple timeframes. By using the weighted average of three different timeframes the indicator has less volatility and fewer trade signals compared to other oscillators that rely on a single timeframe. Buy and sell signals are generated following divergences. The Ultimately Oscillator generates fewer divergence signals than other oscillators due to its multi-timeframe construction.

Key Takeaways

  • The indicator uses three timeframes in its calculation: seven, 14, and 28 periods.
  • The shorter timeframe has the most weight in the calculation, while the longer timeframe has the least weight.
  • Buy signals occur when there is bullish divergence, the divergence low is below 30 on the indicator, and the oscillator then rises above the divergence high.
  • A sell signal occurs when there is bearish divergence, the divergence high is above 70, and the oscillator then falls below the divergence low.

The Formula for the Ultimate Oscillator Is:

UO = [ ( A 7 × 4 ) + ( A 1 4 × 2 ) + A 2 8 4 + 2 + 1 ] × 1 0 0 where: UO = Ultimate Oscillator A = Average Buying Pressure (BP) = Close − Min ( Low , PC ) PC = Prior Close True Range (TR) = Max ( High , Prior Close ) − True Range (TR) = Min ( Low , Prior Close ) Average 7 = ∑ p = 1 7 BP ∑ p = 1 7 TR Average 1 4 = ∑ p = 1 1 4 BP ∑ p = 1 1 4 TR Average 2 8 = ∑ p = 1 2 8 BP ∑ p = 1 2 8 TR \begin &\text = \left [ \frac< ( \text_7 \times 4 ) + ( \text_ <14>\times 2 ) + \text_ <28>> < 4 + 2 + 1 >\right ] \times 100 \\ &\textbf \\ &\text = \text \\ &\text = \text \\ &\text = \text – \text ( \text, \text ) \\ &\text = \text \\ &\text = \text ( \text, \text ) – \\ &\phantom <\text=> \text ( \text, \text ) \\ &\text_7 = \frac< \sum_^ <7>\text >< \sum_^ <7>\text > \\ &\text_ <14>= \frac< \sum_^ <14>\text >< \sum_^ <14>\text > \\ &\text_ <28>= \frac< \sum_^ <28>\text >< \sum_^ <28>\text > \\ \end ​ UO = [ 4 + 2 + 1 ( A 7 ​ × 4 ) + ( A 1 4 ​ × 2 ) + A 2 8 ​ ​ ] × 1 0 0 where: UO = Ultimate Oscillator A = Average Buying Pressure (BP) = Close − Min ( Low , PC ) PC = Prior Close True Range (TR) = Max ( High , Prior Close ) − True Range (TR) = Min ( Low , Prior Close ) Average 7 ​ = ∑ p = 1 7 ​ TR ∑ p = 1 7 ​ BP ​ Average 1 4 ​ = ∑ p = 1 1 4 ​ TR ∑ p = 1 1 4 ​ BP ​ Average 2 8 ​ = ∑ p = 1 2 8 ​ TR ∑ p = 1 2 8 ​ BP ​ ​

How to Calculate the Ultimate Oscillator

  1. Calculate the Buying Pressure (BP) which is the close price of the period less the low of that period or prior close, whichever is lower. Record these values for each period as they will be summed up over the last seven, 14, and 28 periods to create BP Sum.
  2. Calculate the True Range (TR) which is the current period’s high or the prior close, whichever is higher, minus the lowest value of the current period’s low or the prior close. Record these values for each period as they will be summed up over the last seven, 14, and 28 periods to create TR Sum.
  3. Calculate Average7, 14, and 28 using the BP and TR Sums calculations from steps one and two. For example, the Average7 BP Sum is the calculated BP values added together for the last seven periods.
  4. Calculate the Ultimate Oscillator using the Average7, 14, and 28 values. Average7 has a weight of four, Average14 has a weight of two, and Average28 has a weight of one. Sum the weights in the denominator (in this case, the sum is seven, or 4+2+1). Multiply by 100 when other calculations are complete.

What Does the Ultimate Oscillator Tell You?

The Ultimate Oscillator is a range-bound indicator with a value that fluctuates between 0 and 100. Similar to the Relative Strength Index (RSI), levels below 30 are deemed to be oversold, and levels above 70 are deemed to be overbought. Trading signals are generated when the price moves in the opposite direction as the indicator, and are based on a three-step method.

Larry Williams developed the Ultimate Oscillator in 1976 and published it in Stocks & Commodities Magazine in 1985. With many momentum oscillators correlating too heavily to near-term price movements, Williams developed the Ultimate Oscillator to incorporate multiple timeframes to smooth out the indicator’s movements and provide a more reliable indicator of momentum, with fewer false divergences.

False divergences are common in oscillators that only use one timeframe, because when the price surges the oscillator surges. Even if the price continues to rise the oscillator tends to fall forming a divergence even though the price may still be trending strongly.

In order for the indicator to generate a buy signal, Williams recommended a three-step approach.

  • First, a bullish divergence must form. This is when the price makes a lower low but the indicator is at a higher low.
  • Second, the first low in the divergence (the lower one) must have been below 30. This means the divergence started from oversold territory and is more likely to result in an upside price reversal.
  • Third, the Ultimate oscillator must rise above the divergence high. The divergence high is the high point between the two lows of the divergence.

Williams created the same three-step method for sell signals.

  • First, a bearish divergence must form. This is when the price makes a higher high but the indicator is at a lower high.
  • Second, the first high in the divergence (the higher one) must be above 70. This means the divergence started from overbought territory and is more likely to result in a downside price reversal.
  • Third, the Ultimate oscillator must drop below the divergence low. The divergence low is the low point between the two highs of the divergence.

The Difference Between the Ultimate Oscillator and Stochastic Oscillator

The Ultimate Oscillator has three lookback periods or timeframes. The Stochastic Oscillator has only one. The Ultimate Oscillator doesn’t typically include a signal line (one could be added), while the Stochastic does. While both indicators generate trade signals based on divergence, the signals will be different due to the different calculations. Also, the Ultimate Oscillator uses a three-step method for trading divergence.

Limitations of Using the Ultimate Oscillator

While the three-step trading method for the indicator may help eliminate some poor trades, it also eliminates many good ones. Divergence is not present at all price reversal points. Also, a reversal won’t always occur from overbought or oversold territory. Also, waiting for the oscillator to move above the divergence high (bullish divergence) or below the divergence low (bearish divergence) could mean poor entry point as the price may have already run significantly in the reversal direction.

As with all indicators, the Ultimate Oscillator shouldn’t be used in isolation, but rather as part of a complete trading plan. Such a plan will typically include other forms of analysis such as price analysis, other technical indicators, and/or fundamental analysis.

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Ultimate Oscillator

There are many technical tools one can use when analyzing data to make a sound trading prediction. Those tools cannot guarantee that you will win every trade, but they can certainly increase your chances a lot. Among the most common tools are oscillators, which can be extremely powerful because they take a long period of time into account, so they can provide you with very useful information. Every trader can adapt oscillators to his/her trading strategy, and in this article we will explain how one particular type of oscillators works – the ultimate oscillator. Keep reading and get informed!

Ultimate Oscillator | Definition

The ultimate oscillator is a technical indicator invented by Larry Williams. It uses the weighted average of three different time periods to reduce volatility and false transaction signals associated with many other indicators that rely on a single time period. As you can guess by its name, it belongs to the group of tools which are called Oscillators.

This is a range-bound indicator, meaning the value fluctuates between 0 and 100. Levels below 30 are deemed to be oversold, and levels above 70 are considered overbought (which is very similar to the RSI). Although it’s not as famous as RSI, it can be very useful in finding bullish or bearish divergences that a price makes. After this short introduction, let us now introduce you to the way ultimate oscillators can be used in your analysis. Stay with us!

Ultimate Oscillator | Common Strategy

The first thing you should consider when using your ultimate oscillator is the value your oscillator has. As already mentioned, this value can be between the 0 and 100 level, but most of the time it stays between 30 and 70. Therefore, the actual middle range is the 50 level, and that’s the level you should take into consideration while looking for divergences between the price and the oscillator. One of the two (price or oscillator) will always lie. It’s always safer to stay with the oscillator, as the oscillator takes into account a bigger period of time than the actual price.

If you have a bearish trend, the market you’re observing will make a low in the 10-20 area, and the second low won’t be confirmed by the oscillator. In this case, the price is making two consecutive lows, but at the same time, the oscillator will be having the second move above the 20 level – that means this divergence is bullish, as it takes a Trend Line and connects the two lows. The rising trend will be eventually shown, due to the connection of the two lows.

Ultimate Oscillator | Conclusion

Without any doubt, the ultimate oscillator can be a very helpful tool. It uses three different time frames, which makes it more reliable, especially in long-term trading. It’s not very complicated, so we think you will learn how to handle it without any problems. It will take you some time, though, but it is an investment of a great importance for your trading future, so don’t wait and start learning about the ultimate oscillator right away!

1. Trade Your Way To Financial Freedom (Van K. Tharp, 1998)
2. Trading By The Minute (J. Ross, 1994)
3. Stock trading, information production, and executive incentives (Qiang Kanga, Qiao Liu-2008)
4. The Mathematics Of Money Management: Risk Analysis Techniques For Traders (R. Vince, 1992)
5. Options and Options Trading (RW Ward – 2004)

Ultimate Oscillator

Ultimate Oscillator

This lesson will cover the following

  • Explanation and calculation
  • How to interpret this indicator
  • Trading signals, generated by the indicator

Developed by Larry Williams in 1976 and introduced in Stocks & Commodities Magazine in 1985, the Ultimate Oscillator attempts to capture momentum across three different time periods, aimed at avoiding drawbacks of other oscillators. Many of the momentum-based oscillators increase at the start of a strong move up, after which they create bearish divergence, as the price surge continues, because they follow a single time frame only.

The time frames used for the Ultimate Oscillator are as follows: short-term (7 periods), medium-term (14-periods) and long-term (28 periods). These time frames overlap each other, or the long-term time frame encloses both the medium-term and the short-term time frames.

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The Ultimate Oscillator (UO) is calculated using the following steps:

First, calculating Buying Pressure in order to identify price action direction,

Second, measuring Buying Pressure in relation to the True Range in order to determine the magnitude of a profit or a loss,

Third, calculating averages using the three time frames we mentioned above,

Fourth, calculating a weighted average, based on the three averages (the oscillator itself).

The calculations are as follows:

1. Buying Pressure = Close – Minimum (Low Price or Previous Close),

2. True Range = Maximum (High Price or Previous Close) – Minimum (Low Price or Previous Close),

3. Average (7-period) = (7-period Buying Pressure Sum) / (7-period True Range Sum)

Average (14-period) = (14-period Buying Pressure Sum) / (14-period True Range Sum)

Average (28-period) = (28-period Buying Pressure Sum) / (28-period True Range Sum)

4. UO = 100 x [(4 x Average7) + (2 x Average14) + Average28] / (4+2+1)

Buying Pressure and its relation to the True Range are the core of the UO. According to Williams, the best way to estimate Buying Pressure is just to subtract the Closing Price from the Low Price or the Previous Closing Price, the lowest of the two. The UO usually surges, when Buying Pressure is strong and declines, when Buying Pressure is weak.

According to the criteria, defined by Larry Williams, a signal to buy is generated when:

1. A Bullish Divergence is created between prices and the Ultimate Oscillator. This is a situation, when the market forms lower lows, while the oscillator forms higher lows.

2. During the divergence the UO has dropped below the level of 30. This is required in order to make sure that prices are oversold.

3. The UO has climbed above the high, formed during the Bullish Divergence.

A long position should be closed, when the oscillator climbs above the 70 level, or climbs above 50 and then drops back below 45.

A signal to sell is generated when:

1. A Bearish Divergence is created between prices and the Ultimate Oscillator. This is a situation, when the market forms higher highs, while the indicator forms lower highs.

2. During the divergence the UO has climbed above the level of 70. This is required in order to make sure that prices are overbought.

3. The UO has dropped below the low, formed during the Bearish Divergence.

A short position should be closed, when the oscillator drops below the 30 level, or surges again above 55 after falling below 50.

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