Mastering the Ultimate Oscillator: Your Guide for MetaTrader 5

If you're diving into the world of trading, you’ve probably come across various oscillators. They typically compare the smoothed price of a financial instrument with its value from several periods back. Larry Williams, a notable figure in trading, pointed out that the effectiveness of these oscillators can vary based on the number of periods selected for calculation. This insight led him to develop the Ultimate Oscillator, which cleverly combines three oscillators with different calculation periods.

Larry first introduced this oscillator back in 1985 through an article in "Technical Analysis of Stocks and Commodities". The Ultimate Oscillator generates values ranging from 0 to 100, with 50 being the midpoint. If the indicator dips below 30, it signals an overbought condition, while values between 70 and 100 indicate an oversold condition.

By default, you can set the oscillator to three time periods: 7, 14, and 28 bars. Remember that longer periods include the data from shorter ones, meaning the 28-period values will take into account the 14 and 7-period values. Thus, the 7-period data has the most significant influence on the oscillator's result.

According to Larry Williams, the key to successful trading with this oscillator lies in spotting divergences.

When to Buy:

Look for a bullish divergence: the prices hit a lower low that isn’t confirmed by a corresponding lower low in the oscillator.
The oscillator must drop below 30 during this bullish divergence.
Wait for the oscillator to rise above the highest level it reached during the bullish divergence. That’s your cue to buy!

To close your long positions, keep an eye out for the following:

If the oscillator climbs above 50 and then dips below 45.
When it goes above 70 (sometimes it’s wise to wait until it drops back below 70).
If you see sell signals popping up.

When to Sell:

Look for a bearish divergence: the prices establish a higher high that isn’t confirmed by a corresponding higher high from the oscillator.
The oscillator should rise above 50 during this bearish divergence.
Finally, ensure the oscillator drops below the highest level it reached during the formation of the bearish divergence.

To close your short positions, watch for these signs:

If the oscillator climbs above 65.
When it dips below 30.
If buy signals start to emerge.

Ultimate Oscillator

How to Calculate the Ultimate Oscillator:

1. Determine the current "True Low" (TL), which is the lesser of the current low and the previous closing price.

TL (i) = MIN (LOW (i) || CLOSE (i - 1))

2. Calculate the current "Buying Pressure" (BP), which is the difference between the current closing price and the current True Low.

BP (i) = CLOSE (i) - TL (i)

3. Define the "True Range" (TR), which is the highest value among the following differences: current high minus low; current high minus previous close; current low minus previous close.

TR (i) = MAX (HIGH (i) - LOW (i) || HIGH (i) - CLOSE (i - 1) || CLOSE (i - 1) - LOW (i))

4. Sum the BP values across all three calculation periods:

BPSUM (N) = SUM (BP (i), i)

5. Sum the TR values across all three calculation periods:

TRSUM (N) = SUM (TR (i), i)

6. Calculate the "Raw Ultimate Oscillator" (RawUO):

RawUO = 4 * (BPSUM (1) / TRSUM (1)) + 2 * (BPSUM (2) / TRSUM (2)) + (BPSUM (3) / TRSUM (3))

7. Finally, calculate the "Ultimate Oscillator" (UO):

UO = ( RawUO / (4 + 2 + 1)) * 100

Where:

MIN means the minimum value;
MAX refers to the maximum value;
|| represents a logical OR;
LOW (i) is the minimum price of the current bar;
HIGH (i) is the maximum price of the current bar;
CLOSE (i) is the closing price of the current bar;
CLOSE (i - 1) is the closing price of the previous bar;
TL (i) is the True Low;
BP (i) denotes the Buying Pressure;
TR (i) signifies the True Range;
BPSUM (N) is the sum of BP values for an n period;
TRSUM (N) is the sum of TR values for an n period;
RawUO stands for the Raw Ultimate Oscillator;
UO represents the Ultimate Oscillator.

Mastering the Ultimate Oscillator: Your Guide for MetaTrader 5

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