What is the Ultimate Oscillator?
Developed by Larry Williams in 1976, the ultimate oscillator (ULTOSC) is a technical indicator that measures the price momentum of a currency pair across various timeframes.
How the ULTOSC is Measured
Using the weighted average of three different time frames to represent short, medium and long-term market trends allows the indicator to have less volatility and trade signals compared to other oscillators that rely on single time frames.
The ULTOSC’s use of varied time frames assures the indicators movements are smooth and provides a reliable indicator of momentum with less false divergences. Buy and sell signals are produced by following divergences.
What Does Using the Ultimate Oscillator Indicate?
Being a range-bound indicator, the ultimate oscillator fluctuates with values between 0-100. Therefore, levels below 30 indicate oversold currencies and levels above 70 indicate overbought currencies. Trading signals are then generated when price moves opposite to the indicator.
Indicating a buy signal:
- There must be a bullish divergence, evident when a currencies price makes a lower low but the indicator remains at a higher low.
- The first low in the divergence must have been below 30 to indicate that the divergence started from oversold territory and will most likely result in an upside price reversal.
- The ULTOSC indicator needs to rise above the divergence high, which is the high point between the two lows of the divergence.
Similarly, indicating a sell signal is as follows:
- There must be a bearish divergence, evident when a currencies price makes a higher high but the indicator remains at a lower high.
- The first high in the divergence must be above 70 in order to confirm that the divergence started from overbought territory and will most likely result in a downside price reversal.
- The ULTOSC indicator needs to drop below the divergence low, which is the low point between the two highs of the divergence.