Trading with the Percentage Price Oscillator (PPO)

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Percentage Price Oscillator – PPO

What is the Percentage Price Oscillator – PPO?

The percentage price oscillator (PPO) is a technical momentum indicator that shows the relationship between two moving averages in percentage terms. The moving averages are a 26-period and 12-period exponential moving average (EMA).

The PPO is used to compare asset performance and volatility, spot divergence which could lead to price reversals, generate trade signals, and help confirm trend direction. The PPO is identical to the moving average convergence divergence (MACD) indicator, except the PPO measures percentage difference between two EMAs, while the MACD measures absolute (dollar) difference. Some traders prefer the PPO because readings are comparable between assets with different prices, whereas MACD readings are not comparable.

Key Takeaways

  • The PPO typical contains two lines, the PPO line, and the signal line. The signal line is an EMA of PPO, so it moves slower than the PPO.
  • The PPO crossing the signal line is used by some traders as a trade signal. When it crosses above from below, that is a buy, when it crosses below from above that is a sell.
  • When the PPO is above zero that helps indicate an uptrend, as the short-term EMA is above the longer-term EMA.
  • When the PPO is below zero, the short-term average is below the longer-term average, which helps indicate a downtrend.

Formula and Calculation for PPO

Use the following formula to calculate the relationship between two moving averages for a holding.

  1. Calculate the 12-period EMA of the asset’s price.
  2. Calculate the 26-period EMA of the asset’s price.
  3. Apply these to the PPO formula to get the current PPO value.
  4. Once there are at least nine PPO values, generate the signal line by calculating the nine-period EMA of the PPO.
  5. To generate a histogram reading, subtract the current PPO value from the current signal line value. The histogram is an optional visual representation of the distance between these two lines.

What the Indicator Tells You

The PPO and the MACD are both momentum indicators that measure the difference between the 26-period and the 12-period exponential moving averages. The main difference between these indicators is that the MACD reports the absolute difference between the EMAs, whereas the PPO expresses this difference as a percentage. This allows a trader to use the PPO indicator to compare assets with different prices more easily. For example, regardless of the asset’s price, a PPO result of 10 means the short-term average is 10% above the long-term average.

The PPO generates trade signals in the same way the MACD does. The indicator generates a buy signal when the PPO line crosses above the signal line from below, and a sell signal occurs when the PPO line crosses below the signal from above. The signal line is created by taking a nine-period EMA of the PPO line. Signal line crossovers are used in conjunction with where the PPO is relative to zero/centerline.

When the PPO is above zero, that helps confirm an uptrend since the short-term EMA is above the longer-term EMA. When the PPO is below zero, the short-term EMA is below the longer-term EMA, which is an indication of a downtrend. Some traders prefer to only take signal line buy signals when the PPO is above zero, or the price shows an overall upward trajectory. Similarly, when the PPO is below zero, they may ignore buy signals, and/or only take short-sell signals.

Centerline crossovers also generate trading signals. Traders consider a move from below to above the centerline as bullish, and a move from above to below the centerline as bearish. The PPO crosses the centerline when the 12-period and 26-period moving average cross.

Traders can also use the PPO to look for technical divergence between the indicator and price. For example, if the price of an asset makes a higher high, but the indicator makes a lower high, it may indicate the upward momentum is subsiding. Conversely, if an asset’s price makes a lower low, but the indicator makes a higher low, it could suggest that the bears are losing their traction and the price could head higher soon.

Comparing Assets

The PPO’s percentage value allows traders to use the indicator to compare different assets in terms of performance and volatility. This is particularly useful if the assets vary significantly in price.

For example, A trader who is comparing Apple, which is trading at $175, and Amazon, which is trading at $1,650, could compare the indicator’s oscillating range for each stock to determine which one is more volatile.

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If the PPO’s range for Apple is between 3.25 and -5.80 for the last year, and Amazon’s PPO range is between 2.65 and -4.5, it is evident that Apple is more volatile because it has a 9.05 point range compared to Amazon’s 7.15 point range. This is a very rough comparison of volatility between the two assets. The indicator is only measuring and reflecting the distance between two moving averages, not actual price movement.

The PPO indicator is also useful for comparing momentum between assets. Traders simply need to look at which asset has a higher PPO value to see which has more momentum. If Apple has a PPO of three and Amazon has a PPO value of one, when Apple has had more recent strength, since its short-term EMA is further above the longer-term EMA.

PPO and Relative Strength Index – RSI Differences

The PPO measures the distance between a shorter and longer-term EMA. The relative strength index is another type of oscillator that measures recent price gains and losses. The RSI is used to help assess overbought and oversold conditions, as well as spot divergences and confirm trends. The indicators are calculated and interpreted differently, therefore they will each provide different information to traders.

Limitations of PPO

The PPO is prone to providing false crossover signals, both in terms of signal line crossovers and centerline crossovers. Assume the price is rising, but then moves sideways. The two EMAs will converge during the sideways period, likely resulting in a signal line crossover and potentially a centerline crossover. Yet the price hasn’t actually reversed or changed direction, it just paused. Traders using the PPO must keep this in mind when using the PPO to generate trade signals.

Two or more crossovers may occur before a strong price move develops. Multiple crossovers without a significant price move are likely to result in multiple losing trades.

The indicator is also used to spot divergences, which may foreshadow a price reversal. Yet divergence is not a timing signal. It can last a long time, and won’t always result in a price reversal.

The indicator is composed of the distance between two EMAs (the PPO), and an EMA of the PPO (signal line). There is nothing inherently predictive in these calculations. They are showing what has occurred, and not necessarily what will happen in the future.

Trading with the Percentage Price Oscillator (PPO)

Most traders have heard of the MACD indicator, but far less have heard of the Percentage Price Oscillator (PPO), also sometimes called the Price Percentage Oscillator. The two indicators are very similar except that the PPO has a couple distinct advantages over the MACD.

The Percentage Price Oscillator

Like the MACD, the PPO is an indicator based on how the 26 and 12 period exponential moving averages (EMA) are acting in relation to one another. When the PPO (or MACD) is moving higher, momentum is to the upside. When the PPO is moving lower, momentum is to the downside.

When the PPO (or MACD) crosses above the zero line (into positive territory) it means the 12-period EMA has crossed above the 26-period EMA, signaling a potential trend shift to the upside. When the PPO crosses below zero (into negative territory) it means the 12-period EMA has crossed below the 26-period EMA, and the trend may be reversing to the downside.

Another moving average is applied directly to the PPO itself to provide additional trade signals.

The MACD and PPO are used for the same purposes, and have three main ways of providing trade signals and/or analytical insight.

First, figure 1 shows the S&P 500 with both the PPO and MACD indicators–other than different values along the right hand side of the indicator (we’ll get to this in a second), the movements of the indicators are almost identical.

Figure 1. S&P 500 ETF with PPO and MACD

Traditionally the MACD and PPO have provided three basic trade signals.

  • Go long when the PPO (bluish line in figure 1) crosses above zero. Go short, or get out of longs, when the PPO crosses below zero. Shown in figure 2.

Figure 2. PPO Zero Line Crossover Trade Signals

  • Go long when the PPO crosses above its 9-day EMA. Go short when the PPO crosses below its 9-day EMA. Shown in figure 3.

Figure 3. PPO Crossing EMA Trade Signal

The third way to traditionally use the PPO is not really a trade signal. Rather it just provides a warning about a potential reversal of trend.

  • Watch for divergence. When the price is making new highs, but the PPO isn’t, it warns a correction in price may be coming soon. When the price is making new lows, but PPO isn’t, it warns a rally in price may be coming soon.

Figure 4. PPO and Price Divergence

Why PPO is Better than MACD

Arguable, PPO is a better indicator than the MACD. PPO measures percentage movements, while MACD measures absolute movements. Since stocks vary in price, MACD readings can’t be used to compare one asset to another. With PPO you can compare assets. For example, if the price of one asset is rallying and reaches 4 on the PPO, you know that it is a stronger move than if another asset only reaches 2.

Also, when an asset makes a very large price move the MACD levels increase based on the rising price of the asset. This can cause divergence anomalies.

Figure 5 shows this in Netflix stock. As the stock moves up from about $250 to nearly $460 the MACD makes a major higher-high along with price (no divergence). The PPO, which is only concerned with percentage moves, doesn’t make a new high (divergence) and warns of the price correction which shortly followed.

Figure 5. PPO and MACD Level Comparison on Large Price Moves

It could also occur that the PPO makes a new higher-high or lower-low, when the MACD doesn’t. When this occurs, trust PPO.

If given a choice between PPO and MACD, PPO provides a truer picture than the MACD of what is occurring over time. PPO is not skewed by large price moves (MACD is) and PPO also allows for direct comparison between assets. While assets may all have different prices, the PPO compares their percentage movements so you can quickly see which asset is stronger is weaker. If just looking at one asset during the day, the indicators are virtually identical, but if you want to compare asset strength or trade on longer-time frames, PPO is the better choice.

Price Oscillator (PPO)

Indicators and Strategies

Price Oscillator (PPO)

The Price Oscillator indicator (PPO) is a technical analysis tool, used for measuring momentum that is very similar to the MACD. The MACD employs two Moving Averages of varying lengths (which are lagging indicators) to identify trend direction and duration. Then, MACD takes the difference in values between those two Moving Averages (MACD Line) and an EMA of those Moving Averages (Signal Line) and plots that difference between the two lines as a histogram which oscillates above and below a center Zero Line.

PPO is exactly the same, however it then takes the same values as the MACD and calculates them as a percentage. The purpose of this, is that it makes value comparisons much more simple and straightforward over longer durations of time.

Read more about the Price Oscillator.

This is a pretty straightforward script that adds alerts to Pekipek’s excellent PPO Divergence indicator and changes the visuals a bit. You can have the alerts fire on these events: Purple Circle (bullish signal) Orange Circle (bearish signal) Green Dot (High Point) Red Dot (Low Point) I use this on daily Forex charts to get alerts when purple or orange dots.

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