The Ultimate Oscillator is a stock analysis tool created by Larry Williams in 1976 that measures momentum by including data from three different time periods. It avoids false signals and sends buy signals when a bullish divergence occurs. The equation includes buying pressure and true range, and the final oscillator is calculated by summing weighted averages. If the total is less than 30 and there is less downward momentum in the oscillator than in the stock’s price, a bullish divergence is occurring and the stock should be purchased.
The Ultimate Oscillator is a stock analysis tool that attempts to correctly measure the momentum of a particular stock’s movement. Created by Larry Williams in 1976, it differs from many methods of momentum analysis by including stock data for three different time periods. By including the different time periods and weighting them based on how recent they are, Ultimate Oscillator can avoid some of the false signals sent by narrower predictors. Buy signals are sent by the oscillator when it shows a bullish divergence, meaning that the oscillator forms a low total higher than the stock’s price.
Many stock technical analysis methods created by investment experts promise the ability to predict the future movement of stock prices based on past performance. A disadvantage of some of these techniques may be that they only encompass one time frame, omitting information about past prices that may be relevant to future movement. The Ultimate Oscillator attempts to avoid this pitfall by broadening the scope of 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 Ultimate Oscillator. The “buying pressure”, which measures the direction of the price, is calculated by subtracting the price floor, which can be the lowest price reached by the security on the day measured or, if lower, the closing price of the previous day, from the price of end of the measured day. The “True range”, which determines the distance of a stock market movement, is reached by subtracting the minimum price from the maximum price reached on the day in question. Again, the previous day’s closing price can be used for one of these 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 Buy Pressure totals and dividing it by the sum of the True Range totals for the same time period.
The final step in calculating the final oscillator is the sum of the weighting 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 is kept as-is. These totals are added, divided by 7, and then multiplied by 100. If this total is less than 30, and there is less downward momentum in the oscillator total than in the stock’s price, a bullish divergence is occurring and the stock should be purchased.
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