What Is The Ultimate Oscillator & How To Trade With It

Ultimate Oscillator Explained

Technical oscillators can work well in all respects, but one of the signifcant drawbacks is that such trading tools take into account the situation only on the current timeframe. Larry Williams decided to try and fix this problem when he created the Ultimate Oscillator in 1976 to measure the price momentum of an asset across multiple timeframes.

Before proceeding to the description of the indicator, we should focus on the personality of Larry Williams himself, as many novice traders confuse him with his namesake Bill Williams. Among professional traders, this person is considered one of the most respected teachers, since before giving lectures he was able to produce good results trading using his methodologies. Thus, Larry Williams is one of the teachers whose opinion has real weight since he has historically used his trading tools.

What is the Ultimate Oscillator?

In general, what is an oscillator? In technical analysis, this term refers to a function that compares the current price with a quote fixed by a specified number of previous candles. Depending on the method of calculation, such indicators can be divided into relative and absolute. In particular, the former is designed to search for cyclical fluctuations, and the latter simply measures the difference between prices.

RSI on chart
RSI on chart

The figure above shows a classic example – RSI. Undoubtedly, many traders are familiar with the RSI indicator since it identifies pullbacks and the strength of impulses quite well. Still, it has one important drawback – it only evaluates the situation on the current timeframe, therefore for complex analysis, it is often necessary to set this index on several charts at once.

Larry Williams noticed this feature and decided to average the values ​​of three indicators calculated for different periods at once. The result is an algorithm that he later called Ultimate Oscillator.

By the way, the fact of the absence of this tool in the standard assembly of the MetaTrader4 terminal seems a little strange, since Larry described it back in 1985 (the article of the same name was published in the magazine “Technical analysis of stocks and commodities”). During this time the algorithm proved to be effective. At least it is no worse than RSI, stochastics oscillator and other similar analogs.

Nevertheless, despite the visual resemblance to classical indicators, the formula proposed by Williams is much more complicated in terms of calculations; therefore, at each stage of calculations, we should dwell in more detail. In particular, at the first stage, the indicator determines the true price lows.

By this term, Larry means the lowest value from the current low and previous close prices. When the desired values ​​for each bar have been calculated, the so-called “buying pressure” (BP) is estimated by subtracting the variable TL from the current close price.

In the second stage of the Ultimate Oscillator calculation, an indicator called the average true range (ATR) is measured. As in the case of ATR (a popular indicator of volatility), this term refers to the largest value from the following ranges:

  • Current high – current low;
  • Current high – close price of the previous candle;
  • Previous close price – current low.

In the next step, for each of the three periods (recall, in the Larry Williams oscillator, the cycles of 3-time intervals are taken into account immediately), the BP (purchasing pressure) values ​​are summed up. The same thing happens with true ranges.

To better understand what is being discussed, consider a specific example. Suppose that the situation is analyzed at three intervals, the duration of which is 10, 20, and 30 candles. If we need to calculate the cumulative purchasing pressure (BPSUM), we have to add up the BL values ​​separately for each of these periods.

A similar principle works when calculating the total true range (TRSUM), in particular. First, the TR values ​​are summed over the last ten candles. The calculations are repeated, but already over the last 20 bars, and at the final stage, the third value is determined, which corresponds to the longest period.

After the BPSUM and TRSUM of each of the ranges have been calculated, the “draft” version of the Ultimate Oscillator is built. At this stage, the ratios of the mentioned values ​​of each of the periods are summarized. In contrast, their values ​​are adjusted for special weighting coefficients (specific values ​​are set by the user).

At the final stage, the obtained draft values ​​are divided by the sum of all weighing factors, multiplied by 100. The result is a classic oscillator, the values ​​of which vary in the range from 0 to 100 (although most of the time, the indicator line is in corridor 30 – 70).

Ultimate Oscillator on chart
Ultimate Oscillator on chart

How to use the Ultimate Oscillator?

We have repeatedly noted above that this indicator is essentially no different from its main competitors; therefore, its signals should be interpreted according to the general rules that are characteristics of all oscillators. In particular, most often, this algorithm is used to search for overbought and oversold conditions.

Overbought refers to a situation where the Ultimate Oscillator line is above level 70, and a formation is considered as oversold, within which the indicator value ranges from 0 to 30. Of course, the listed bars are recommended, but the user has the right to correct them in any direction on a vertical scale.

For example, if you increase the overbought/sold levels, the signal quality may increase significantly, but the entry points will become less frequent. If you lower the overbought/sold levels, the indicator will begin to generate entry points more often, but their accuracy may be less.

Ultimate Oscillator - overbought & oversold
Ultimate Oscillator – overbought & oversold

Also, attention should be paid to the fact that it is advisable to conclude transactions from overbought/oversold only after the indicator line leaves the critical state, i.e., in the first case it breaks the bottom level from the bottom up. In the second one, it tests the bar from top to bottom. If this rule is neglected, the probability of catching a false signal increases significantly.

The Ultimate Oscillator in forex can also be used within the framework of the strategy proposed by Larry Williams himself, in particular, its central link is the discrepancy between the dynamics of the indicator and the market price (they are also called divergences).

According to the classical rules, a buy trade should be opened subject to the following conditions:

  • While the price updates the local low, the indicator line should not break its last low;
  • At the time of the formation of the bullish divergence, the indicator value was below 30;
  • A buy order is opened only after the oscillator updates its local high formed during the formation of the entire structure of the bullish divergence.
Ultimate Oscillator - bullish divergence
Ultimate Oscillator – bullish divergence

Thus, in one signal, bullish divergence is combined with trading rules from the level of oversold, i.e. the entry point is more accurate. Closing an open buy position is much easier, in particular, a trader can choose one of three scenarios:

  • Ultimate Oscillator breaks through level 50, after which it returns to the area below 45 – this option is suitable for medium-term and intraday traders who prefer to catch small movements;
  • The indicator breaks through level 70 from the bottom up, but then returns to its usual range again – an option for long-term people who prefer to squeeze the high out of the trend;
  • If a valid sell signal appears.

On some assets, it makes sense to break the position into three orders, each of which is accompanied by one of the options listed above. Such tactics will make it possible to take advantage of each approach, in particular, the first signal can help bring the position to breakeven, the second will ride the move as much as possible, and the latter will provide an opportunity to catch the whole potential of a strong trend.

A sell deal is concluded on a similar principle, in particular, at the first stage of the analysis, it is necessary to wait until the bearish divergence appears. At the same time, the oscillator should go into the range from 70 to 100 for a while. Directly, the order opens after the indicator line updates its last local low.

Ultimate Oscillator - bearish divergence
Ultimate Oscillator – bearish divergence

It should be noted that we have already optimized the above rules for short positions for the foreign exchange market, so we should not be surprised at insignificant differences with Williams’s (he uses the level of 50, not 70).

The fact is that Larry worked mainly in the stock and futures markets, where the assets in the bearish and bullish phases behave differently (the price falls faster than rises). On forex, uptrends and downtrends are formed according to the same model, since there are currencies in the numerator and denominator of instruments so that you can use the universal approach. As for closing sell positions, here the user could also choose one of three options:

  • Ultimate Oscillator overcomes the bar 50 (from top to bottom), after which it turned around and returned to the range located above 55;
  • The indicator line breaks through level 30, but after some time it fought off the oversold state (it returned to the area located above 30);
  • If a valid buy signal appears.

Ultimate oscillator trading strategy

As a rule, technical indicators are rarely used alone, especially oscillators. More often, they are combined with other algorithms, since such an approach minimizes the consequences of false signals. The formula proposed by Larry Williams is also no exception to this rule.

In particular, forex trading systems in which the Ultimate Oscillator is combined with moving averages and other trend indicators are especially popular. Everything is simple here – the general movement is estimated using additional tools, and the deals themselves are opened according to the signals of the considered oscillator.

The second application of the Ultimate Oscillator involves the imposition of two oscillators with different periods. In this case, the signals will be identified at the moment of the intersection of the two lines, but it should be remembered that in the setup of each algorithm you will have to set the vertical scale to fixed levels (as a rule, the values ​​0 and 100 are used). In the opposite case (if you ignore the binding), the picture will be distorted due to the different scale of the indicator scales.

Interesting signals are also obtained after calculating the moving average directly based on the Williams oscillator itself. This problem can be solved using the “Apply to previous indicator’s data” function, which can be found in the main window of the standard moving average settings.

Ultimate Oscillator buy trade setup

  • If the moving average line is above the ultimate oscillator line and value of ultimate oscillator is near 20 stating an oversold condition, then you can open a buy position.
  • Place the stop-loss slightly below the local low.
  • You can exit your position as per scenarios mentioned above.
Ultimate Oscillator - buy trade setup
Ultimate Oscillator – buy trade setup

Ultimate Oscillator sell trade setup

  • If the moving average line is below the Ultimate Oscillator line and value of Ultimate Oscillator is near 80 stating an overbought condition, then you can open a sell position.
  • Place the stop-loss slightly above the local high.
  • You can exit your position as per scenarios mentioned above.
Ultimate Oscillator - sell trade setup
Ultimate Oscillator – sell trade setup

Ultimate Oscillator conclusion

One of the main advantages of the Ultimate Oscillator indicator is its comprehensive nature. It evaluates the situation not only on the current timeframe but also takes into account the dynamics of prices over previous periods. Such an approach can help to avoid premature conclusions.

The indicator can help with identifying overbought and oversold areas. Although Larry Williams primarily optimized his technical indicators for trading futures and stock markets, they can also be applied in similar ways to forex trading.

I would prefer to use the majority of technical indicators such as the Ultimate Oscillator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

The Ultimate Oscillator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Ultimate Oscillator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Ultimate Oscillator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!