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The ultimate oscillator is a technical indicator that uses buying and selling pressure to identify when an asset may be overbought or oversold. Unlike oscillators like RSI and stochastics that focus solely on price, the ultimate oscillator incorporates trading volume and current closing prices into its calculation.

In this comprehensive guide, you’ll learn the ultimate oscillator, how it works, and how to effectively use it in trading. Read on to gain a deeper understanding of this useful momentum indicator.

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What is the ultimate oscillator indicator? 

The ultimate oscillator is a technical momentum indicator developed 1978 by renowned trader Larry Williams. It aims to incorporate additional variables beyond just price to identify divergences and overbought/oversold conditions.

The indicator uses three different variables in its calculation:

  • The current close price
  • Trading volume
  • Buying and selling pressure

Analyzing these three elements, the ultimate oscillator paints a clearer picture of an asset’s price momentum. It can often spot tops and bottoms earlier than price-based oscillators.

Read this article for more insights: What is a trading indicator and how it helps you as a trader


Is the ultimate oscillator better than RSI?


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The ultimate oscillator indicator incorporates more variables into its calculation than the Relative Strength Index (RSI). Specifically, the ultimate oscillator looks at trading volume, buying/selling pressure, and price. This allows it sometimes to identify turning points earlier than RSI would.

The ultimate oscillator indicator also uses multiple periods in its calculation - usually 7, 14, and 28 bars. This provides a smoother oscillator reading and avoids many false signals that a single-period RSI might generate.

Finally, the scaling from 0 to 100 makes overbought and oversold levels more clearly defined. With RSI, the 70/30 levels are more general guidelines than concrete thresholds.

For these reasons, many traders prefer the ultimate oscillator indicator or use it with RSI for confirmation. However, RSI has the advantage of simplicity. It also reacts quickly to price changes due to looking at only a single period.

So, the ultimate oscillator indicator has strengths in smoothing out signals and incorporating more input variables. But RSI can complement it by being more reactive to recent price swings. Using both together results in fewer false signals overall.


Ultimate oscillator formula

The ultimate oscillator uses a multi-step formula to incorporate buying/selling pressure, trading volume, and closing prices. Here is a breakdown of how it is calculated:

  1. Calculate buying pressure: Current close price - Minimum close price over past x bars
  2. Calculate selling pressure: Maximum close price over past x bars - Current close price
  3. Determine true range: Current high price - Current low price
  4. Sum buying/selling pressure over past x bars and divide by the sum of the true range over x bars
  5. Repeat for second and third variable groupings (typically 7, 14, and 28 bars)
  6. Take the weighted average of all three variable groups
  7. Scale result to between 0 and 100

This process yields the final oscillator reading. As you can see, the ultimate oscillator dynamically weighs three distinct perspectives of buying/selling pressure. This diversification allows it to detect subtle momentum shifts.

Check this article and try using the indicator with this asset: How To Trade Indices


How to use the ultimate oscillator indicator 

Now that you understand what the ultimate oscillator is and how it works let’s discuss some ways it can bolster your trading strategy:

Spot overbought/Oversold levels

Traders commonly utilize the ultimate oscillator indicator to identify overextended moves that may reverse. Recall that readings over 70 suggest an overbought security where sellers could emerge. Readings under 30 indicate an oversold security likely to see buyers return.


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When the price reaches extremes, you can use the ultimate oscillator indicator to confirm whether momentum aligns with the move. Divergences between price and oscillator readings can signal a reversal ahead.

Time entries and exits

In addition to identifying reversals, the ultimate oscillator can improve entry and exit timing.

For example, when the indicator moves into oversold territory, you may initiate long positions in anticipation of a bounce. As it reaches overbought areas, you can take profits or short the security, expecting a pullback. 

Gauge trend strength

The ultimate oscillator indicator also provides clues about the underlying strength or weakness of the current price trend. When indicator readings remain elevated well above 50 even as the security advances further, it tells you bullish momentum is expanding. 

The opposite is true for bearish moves. Declining oscillator values in tandem with new price lows signal waning downside momentum. Analyzing what the indicator “says” about trends can prevent you from fighting strong moves or holding onto weak ones.

Combine with price patterns or other indicators

Pair the ultimate oscillator with complementary indicators or price patterns for even greater effectiveness. For example, you may buy when the oscillator hits oversold levels, and a bullish candlestick pattern emerges. Or you can wait for confirmation from the moving average convergence divergence (MACD) before shorting based on ultimate oscillator signals.

Combining indicators creates a layer of protection against premature trade entries and false signals. The ultimate oscillator works well with volume, RSI, MACD, Bollinger Bands, and chart patterns. Experiment to discover what works for your strategy.

Customize the settings as needed

The standard ultimate oscillator settings use three variable groups - typically set at 7, 14, and 28 previous bars. But you can tweak these settings to suit your trading style or security better. Some traders use shorter groups like 4, 7, and 14 for day trading. Longer-term investors may prefer 14, 28, and 56 for the weekly or monthly charts.

Don’t hesitate to adjust the inputs if you feel a different combination would improve effectiveness. The grouping totals essentially control the indicator’s sensitivity.


To wrap things up

The ultimate oscillator indicator is a versatile momentum trading tool for short-term traders and long-term investors. Blending multiple variables serves as an early warning system for detecting subtle trend shifts and overbought/oversold extremes.

Now that you understand the indicator’s inner workings and various applications, you can deploy it in your trading strategy. Use it to confirm trade signals, time entries, exits, gauge trend strength, or smooth out market volatility.

And remember—the ultimate oscillator indicator is even more powerful (and profitable) when combined with complementary indicators or chart patterns. Carefully build your unique trading toolbox using the ultimate oscillator as one of your trusty go-to tools.

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“When considering “CFDs” for trading and price predictions, remember that trading CFDs involves a significant risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be considered investment advice.

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