The Ultimate Oscillator measures stock momentum by including figures for three different time periods, weighting them according to how recent they are. It sends buy signals when it shows a bullish divergence, and avoids false signals sent by narrower predictors.
The Ultimate Oscillator is a stock analysis tool that attempts to properly measure the momentum of a particular stock’s movement. Created by Larry Williams in 1976, it differs from many momentum analysis methods by including stock figures for three different time periods. By including the different time periods and weighting them according to how recent they are, the final oscillator can avoid some of the false signals sent by narrower predictors. The oscillator sends buy signals when it shows a bullish divergence, which means that the oscillator forms a low total higher than the share price.
Many stock technical analysis methods created by investment experts promise the ability to predict future stock price movement based on past performance. A drawback to some of these techniques may be that they cover only one time period, omitting past price information that may be relevant to future movements. The Ultimate Oscillator tries to avoid this trap by expanding the scope of the information included to try to get a complete picture of stock price momentum.
There are two main components that make up the equation at the heart of the final oscillator. The “buying pressure”, which measures the direction of the price, is calculated by subtracting the minimum price, which can be the lowest price reached by the stock on the day being measured or, if lower, the closing price of the previous day, from the closing price of the measured day The “true range”, which determines the distance of a stock movement, is reached by subtracting the minimum price from the maximum price reached on the day under study. Again, the previous day’s closing price can be used for either of those totals if it is more extreme.
Once 28 days of price information has been collected, the Ultimate Oscillator can be reached. First, averages are calculated for three time periods, 7 days, 14 days, and 28 days. This is done by adding the sum of the Buying Pressure totals and dividing it by the sum of the True Range totals for that same time period.
The last step for the calculation of the final oscillator is to add the weight averages. In this process, the 7-day average is multiplied by 4, the 14-day average is multiplied by 2, and the 28-day average remains as is. These totals are added together, divided by 7, and then multiplied by 100. If this total is below 30, and there is less downward momentum in the oscillator total than in the stock price, bullish divergence is occurring and the stock should be bought
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