The Ultimate Oscillator

There is nothing more intriguing to the beginning commodity or stock trader than the discovery of oscillators. At first, oscillators appear to be the perfect trading tool because so often they give excellent buy and sell signals. But, the more you use oscillators, the more you realize that oscillators give an equal number of false signals. Since the turn of the century, traders have tried to tame their oscillators in order to develop a new approach that does not give false signals or false divergences yet provides an insight into the market that no other tool can. An oscillator actually measures the momentum of data, whether it is price, volume, or open interest. An oscillator will help show the speed at which the information is changing. Thus, it can also define over-bought or over-sold areas. The pioneer in oscillator work was Owen Taylor who in the 1920's presented oscillator work based on 7-day data. Taylor looked at price today versus a 7-day moving average of price or a 7-day moving average of advancing and declining stocks over the last seven days. In the 1940's Woods and Vignolia started their interesting approach to the market measuring volume in what is now known as On Balance Volume. These two gentlemen, based in San Francisco, started running a cumulative positive-negative volume flow that was later popularized by Joe Granville. Woods and Vignolia also did a tremendous amount of oscillator work using 20 to 40-day measurements of days that had up volume versus days that had down volume. Slightly earlier than this, the Lowry Reports out of Florida were busy running moving averages on advancing and declining stock or advancing and declining volume under their heading of "buying pressure" and "selling pressure". In the 1950's not too much was done in the way of oscillators. It wasn't until 1960 that Security Market Research, a service out of Denver, Colorado, showed an oscillator based on the difference between two moving averages that the oscillator number crunchers started getting busy again. The ability to construct oscillators improved substantially with the advent of the computer and especially small personal computers. That allowed the introduction of a new approach to oscillators going beyond a simple moving average. The new trading crowd had been to college, had studied their math, and was suddenly flipping around words like exponentials, supersonic averages, front-end-weighted moving averages, lagged moving averages, rolling numbers, etc. This all reached its zenith in what has become one of the most widely known oscillators constructed by Wells Wilder: the Relative Strength Index. In fact the index is not a measure of relative strength because "relative" means "in relation to something." What Wilder created was an oscillator based on a 14 day time cycle, an oscillator that has a decent record of giving buy and sell signals in the market.

The Oscillator Opportunity

The Oscillator Problem

All About the Ultimate Oscillator

It Is About Time

The Great Equalizer

Measuring Accumulation and Distribution

Constructing the Oscillator

Rules for Using the Ultimate Oscillator

                       CHART 1

in the Ultimate Oscillator to produce the actual signal. Once the divergence for a sell signal has occurred, note the low in the oscillator (Chart 1) prior to the peak that set up the divergence. I have marked this as A on the February 1984 Belly chart. Once the Ultimate Oscillator falls below this low, you can take a short position in the market. The failure in the oscillator is your indication that it is time to sell. Frequently you will see this taking place right at or very close to the actual high in price. After the divergence for a buy signal has occurred note the high in the oscillator prior to the low that set up the divergence. I have marked this as B on the February 1984 Belly chart. Once the Ultimate Oscillator rises above this peak you take a long position. The trend break in the oscillator is your indication that buyers now dominate and an up move will begin. Again, note how close this trend break to the upside occurs in the daily price lows. Once you have entered a position, you will exit in one of the three following manners:

If Short
1. Exit on an opposite signal occurring. You would also be reversing to the long side.
2. Go flat, not reversing, when the Ultimate Oscillator falls to 30% or less. This signal will be early at times but its usage will greatly increase your percent of winners and reduce your number of sleepless nights.
3. Once short, close our your position by going flat any time the index rises above 65%,. This is your initial stop loss.

If Long
1. Exit on an opposite signal occurring. You would also be reversing to the short side.
2. Go flat, not reversing, when the Ultimate Oscillator rises above 70%. Comments in #2 above apply.
3. Once long, close out your position going flat any time the index falls below 45% after having risen
above 50%. This is your stop loss.

All divergence signals must first have seen the index rise above 50% for sell and fallen below 30% for a buy. Divergent patterns that occur without the index first going to these levels are not to be acted upon.

About the author: Larry Williams has been entrenched in the financial markets for over 40 years.  His most notable accomplishment is the creation of the williams %R indicator. However, throughout the last 40 years Williams has developed other tools that are widely used throughout the industry. Other achievements include the pivot point, the williams accumulation/distribution indicator, the shadow technique for moving averages, momentum studies, the 4-year master stock market pattern and numerous trading concepts that are widely accepted in today's trading standards.  Williams has written numerous books on trading the market, teaches at seminars and provides consulting for trading sites such as www.marketclub.com.