Hello friends. It is likely that financial freedom has
crossed your mind at some point in your life, right? So, what have you done to
turn your dream of financial freedom into reality? The most widely known way to
achieve this worldwide is through e-commerce and trading in financial markets.
By trading in financial markets, we can make profits in the short or long term.
To do this, we must first understand technical and fundamental analysis, as
well as learn to control our emotions and manage risks. One of the most
prominent topics in technical analysis is technical indicators. Technical
indicators are analysis tools that contribute to successful trading in the
financial markets. One of these indicators is the Ultimate Oscillator.
What is the Ultimate Oscillator?
The Ultimate Oscillator (UO) is one of the momentum indicators used in technical analysis. This indicator was designed in the 1970s
by George Lane to analyze price movements. The Ultimate Oscillator helps
determine the momentum of the price and overbought or oversold conditions by
using both price and volume data. It can be used for both short-term and
long-term trading, but it is often preferred for short-term trading. The
Ultimate Oscillator measures the strength and speed of price movements and can
provide more information because it is created by combining different time
frames. By taking advantage of this, we can use this indicator to predict trend
changes and generate buy-sell signals. It's easy to use, but it may be less
effective in low-volume markets.
Ultimate Oscillator (UO) calculation
The Ultimate Oscillator (UO) is calculated using three
different periods, which typically represent the 7, 14, and 28-day time frames.
The result of each period is weighted and then used to derive an oscillator.
The calculation formula for the Ultimate Oscillator (UO) is as follows:
UO = [(4 x TR7) + (2 x TR14) + TR28] / (4 + 2 + 1)
Here:
- UO represents the Ultimate Oscillator.
- TR7 represents the 7-day Average True Range (ATR) value.
- TR14 represents the 14-day Average True Range (ATR) value.
- TR28 represents the 28-day Average True Range (ATR) value.
When UO is calculated, it results in an oscillator value
between 0 and 100. A UO value above 70 indicates overbought conditions, while a
UO value below 30 indicates oversold conditions. This oscillator allows us to
measure the strength and speed of price movements and use it in our analysis.
Trading with the Ultimate Oscillator (UO)
The Ultimate Oscillator (UO) indicates that an asset is in
an oversold zone when it is below the 30 level. Crossing above this level
suggests that the asset is in an overbought zone and that the price may
increase. However, it's important to note that the Ultimate Oscillator alone
crossing this level is not a definitive buy signal. It should be evaluated in
conjunction with other technical analysis tools. The Ultimate Oscillator is
generally considered to be in an overbought zone when it's above the 70 level.
Falling below this level can be interpreted as a possible sell signal.
Nevertheless, it is still important to integrate it with other analyses.
Like other technical indicators, the Ultimate Oscillator
(UO) can be used to identify divergences between price movements and the
indicator itself. Positive (bullish) or negative (bearish) divergences can
signal trend changes or reversals. An example of this is shown in the following
4-hour chart of the Australian Dollar/US Dollar:
 |
| Divergence trading with UO in AUD/USD chart |
Remember. The Ultimate Oscillator (UO) can be an effective tool in technical analysis, but it should not be relied upon as a sole signal indicator. UO helps in identifying overbought or oversold conditions, but these conditions do not guarantee a reversal in price. Use UO in combination with other technical analysis tools. Other technical indicators can help confirm or refute UO signals.