Developed by Larry Williams,
the Ultimate Oscillator uses weighted sums of three oscillators,
each of which has a different time period, in an attempt to 'smooth
out' the fluctuations that generally make oscillators hard to interpret.
The ultimate oscillator tries to put you in a trade on the basis
of a divergence (and breakout) in the oscillator's trend. Typically,
traders go long when there is a bullish divergence (the stock's
price makes a lower low but the Oscillator does not). During a bullish
divergence, the ultimate Oscillator's value will usually fall below
30, then rises back above the highest point reached during the bullish
divergence so signally a 'buy'. The position would normally be closed
when either "sell short" conditions are met, or the ultimate oscillator
first rises above 50 and then falls below 45, or the oscillator
rises above 70.
The "Sell short" condition is when a bearish divergence occurs (the
stock's price makes a higher high but the oscillator doesn't). During
this bearish divergence, the ultimate oscillator will usually rise
above 50 then will fall below the lowest point reached during the
bearish divergence. These short positions are closed when either
the conditions are met to buy long as explained above, or the ultimate
oscillator rises above 65, or the oscillator falls below 30. Day
trading with this indicator is difficult as it is normally used
in longer term trading activities, although the principle of scaling
suggests it might have some utility.