Ultimate Oscillator - Trading Indicator : NobleTrading Blog

Thursday, November 19, 2009

Ultimate Oscillator - Trading Indicator

Ultimate oscillator is a useful technical indicator developed by Larry Williams and first described in 1985. It was developed to avoid the false signals generated by many indicators when used in different time periods. This oscillator represents a stock's price action during three different time frames. Ultimate oscillator is a weighted average of three oscillators representing short, intermediate, and long term market cycles or the 7, 14 and 28 periods. The shorter periods are included within the longer period; that is, the 28 period time-frame comprises the 14 and 7 period. Thus shorter periods get more weightage.

Ultimate oscillator is a range bound oscillator, having values ranging from 0 to 100. Like relative strength indicator or RSI, values below 30 are considered oversold and values above 70 are considered overbought. The center line of 50 is often used to find trend changes.

Traders can generate buy and sell signals using ultimate oscillator indicator. Remember, the oscillator offers much better results when used with other indicators.

Buy signals are generated when positive divergence of the oscillator and price occurs; and sell signals are generated when negative divergence occurs.
Buy signals are also generated when the oscillator falls below 30 and then rises back above previous high during the bullish divergence.
Similarly sell signals are generated when the oscillator rises above and then falls back below previous low during the bearish divergence.
Traders should close long positions when the oscillator rises above 70 or when the oscillator rises above 50 and then falls below 45.
Traders should close short positions when the oscillator falls below 30.