Reversal trading is a popular crypto trading strategy where cryptocurrency traders look for signs that a price trend is about to change direction and then make trades to profit from the anticipated reversal, whether it is going up or down. One of the most effective indicators that are used to analyse the possibility to execute this strategy is Ultimate Oscillator. Let’s try to understand this indicator.
1. What’s Ultimate Oscillator
The Ultimate Oscillator is a powerful tool for understanding how fast the price of a cryptocurrency is changing. It is often used to predict when the price trend might reverse. It is an oscillator with values between 0 and 100.
2. How Does Ultimate Oscillator Work
The Ultimate Oscillator works by comparing the buying and selling pressure in the market over three different time periods: short-term, medium-term, and long-term. It looks at how much the price has moved in each period and calculates a value between 0 and 100.
3. Ultimate Oscillator: Learn Calculation
Calculating Ultimate Oscillator is complex. For the convenience of learning, we can break it down to four parts.
| UO = 100 * [(4 * Average [(Close – Lowest of Low) / (Highest of High – Lowest of Low, 7]) + (2 * Average [(Close – Lowest of Low) / (Highest of High – Lowest of Low), 14]) + Average [(Close – Lowest of Low) / (Highest of High – Lowest of Low), 28]] / (4+2+1) |
- For each of the three timeframes (7, 14, and 28), you first find the range between the highest high and the lowest low prices.
- Then, you determine where the current closing price falls within that range. This is done by subtracting the lowest low from the closing price and dividing it by the range (highest high – lowest low).
- You calculate weighted averages for each timeframe: 4 times the 7-period average, 2 times the 14-period average, and 1 times the 28-period average.
- Finally, you add these weighted averages and divide by the sum of the weights (4+2+1) to get the UO value. The result is scaled to a value between 0 and 100.
4. Steps to Launch Ultimate Oscillator on A TradingView Chart
Launching Ultimate Oscillator is a simple nine-step process.
- Sign in to your TradingView account
- Choose the cryptocurrency or trading pair you want to analyse
- Click on the ‘indicator’ button
- In the search bar, type ‘Ultimate Oscillator’ or ‘UO’
- Click on the indicator when it appears in the list of indicators
- Adjust UO settings, like time period, if needed
- Click ‘OK’ to confirm the changes and launch the customised indicator
- Study the UO plot line for trading signals
5. How To Read Ultimate Oscillator
The top trading signals from Ultimate Oscillator are:
UO values above 70 indicate overbought conditions, suggesting a potential price reversal downward. Values below 30 suggest oversold conditions, hinting at a potential price reversal upward.
- Bullish and Bearish Divergence
Bullish divergence occurs when the UO is trending up while the price is trending down, signalling a possible price rise. Bearish divergence is the opposite, signalling a potential price drop.
Endnote
The Ultimate Oscillator is a valuable tool for crypto traders, helping them measure the speed of price changes and predict potential trend reversals. Understanding its calculation, working principles and trading signals can empower traders in the dynamic cryptocurrency market. Meanwhile, it is essential to consider other factors and employ risk management practices for successful trading in the crypto world.