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. Through 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 concepts 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) Formula
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.
The Ultimate Oscillator formula is built to show real buying strength by mixing three different time frames. Instead of looking at one short range, the Ultimate Oscillator formula blends short, mid, and long ranges to create one steady value. This helps us understand how price has moved over a wider period. The Ultimate Oscillator formula uses three main steps:
- It measures buying activity for each time frame.
- It compares this activity with the full price range of the same period.
- It combines all three results into a single number between 0 and 100.
This layered method enables the Ultimate Oscillator formula to avoid fast jumps that many other tools show. This gives traders a smoother reading and makes it easier to judge the strength of the current move.
What Does the Ultimate Oscillator Do?
The Ultimate Oscillator measures the strength of a trend by looking at price action across three different time periods. Instead of focusing on only one look-back period, it blends short, medium, and long views to give a more stable reading. This facilitates traders see whether buyers or sellers are gaining the upper hand. The indicator moves between 0 and 100. When the value is low, it shows that the market has been weak for a while. When the value is high, it shows that price has been strong across the three time frames. Traders often use these moves to spot turning points, hidden shifts in strength, or moments when price may be ready to change direction.
Overall, the Ultimate Oscillator gives a more accurate view of real buying and selling activity by combining several time periods into one simple line. This makes it easier to judge the true strength of a trend without being misled by short-term spikes.
What Are the Best Settings for the Ultimate Oscillator?
The classic settings for the Ultimate Oscillator are 7, 14, and 28. These three ranges balance short-term and longer-term movement, giving a steady and clear reading. Most traders leave these values as they are, because the tool was first designed with this setup in mind.
Some traders change the settings to match their style. For short-term charts, they may lower the values to make the line move faster. For longer charts, they may choose higher values so the line becomes smoother. Even so, the default 7/14/28 setup works well on most markets and time frames. If you're unsure where to start, use the original settings first. After watching how the indicator reacts on your chart, you can adjust the ranges to fit your way of trading.
Ultimate Oscillator (UO) Trading Strategies
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 usually 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.
An effective Ultimate Oscillator strategy looks for changes in buying and selling activity. When the oscillator falls below 30, it often points to an oversold market. When it rises above 70, it usually indicates overbought conditions. These levels can guide decisions about when to enter or exit a trade.
Another way to use an Ultimate Oscillator strategy is by checking for divergence. This happens when the price moves in one direction, but the oscillator moves the opposite way. Divergence can signal that the current trend is weakening, giving a hint that the market might turn soon. 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:
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| Divergences Between Price and Ultimate Oscillator on AUD/USD |
⚠ 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.