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The Ultimate Oscillator Trading Guide

Learn how to use the Ultimate Oscillator to identify overbought and oversold conditions, and trading divergences.


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)


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:

A 4-hour chart of the Australian Dollar/US Dollar currency pair showing a bullish and bearish divergences between price and the Ultimate Oscillator.
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.

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