Developed by Larry Williams in 1976, the Ultimate Oscillator is a combination of three oscillators based on three time spans. In Larry's own words "All oscillators essentially tell us the same thing; how price has performed over a specific time. This indicator is unique in that it combines three time periods, short, intermediate and long-term into one oscillator." The formulation is too complex to describe fully here, however, the author's rules for usage are quite concise...
Williams suggests the following regarding buy and sell signals...
1. Buy on positive divergence where the low of the oscillator has dipped below 30.
2. Sell on negative divergence where the high has exceeded 50.
3. Close long positions when the oscillator exceeds 70.
4. Close short positions when the oscillator goes below 30.
Daily bar chart of Apple Computer. Note the strong buy signal (positive divergence) in early September.
Created using Personal Analyst. Available in all products from Trendsetter Software.
Another factor that adds to the uniqueness of the Ultimate Oscillator is that it does not measure price, rather it measures accumulation and distribution taking place in the market. Williams measured accumulation and distribution by defining selling pressure as the price movement from the high to the close each day while taking the buying measurement to be the difference between the low and the close.
Time is one of the most critical elements in creating a oscillator. Williams chose three different time periods for his oscillator as they generally have been the most dominant time cycles in the market. He based his oscillator 7, 14 and 28-day measurements of accumulation and distribution as he had found those time periods were generally the ones that give the moves most traders wish to trade.