The Ultimate Oscillator combines a stock’s price action during 3 different time frames into one bounded oscillator. These 3-time frames are short, intermediate, and long term market cycles – or 7, 14 and 28-period. This Oscillator was created by Larry Williams.It’s important to remember that all these time periods overlap – the 28-period time frame comprises the 14-period time frame as well as the 7-period time period. It means that the action of the shortest time frame is comprised in the calculation 3 times and has an enlarged influence on the results. It is depicted as a single line put on a vertical range valued between 0 and 100 (where the oversold territory is below 30 and the overbought territory is over 70).
When there is discrepancy between price and the Ultimate Oscillator trading should take place. And a bullish signal is generated, provided the Oscillator falls below 30 during this discrepancy and afterwards the Oscillator moves over its peak during the discrepancy as soon as the price reaches a new bottom and is not supported by a new bottom of the Ultimate Oscillator.
A lot of analysts believe discrepancies between the Ultimate Oscillator as well as a breakout in the trend of the indicator are important signals. For instance, a bearish discrepancy happens when Forex market prices rise to a new peak but the indicator does not follow. Vice versa, a bullish discrepancy happens if Forex market prices shift down to a new bottom but the indicator does not follow.