What is the percentage price oscillator (PPO)?
The Percent Price Oscillator (PPO) is a technical momentum indicator that shows the relationship between two moving averages in percentage terms. Moving averages are a 26-period and 12-period exponential moving average (EMA).
The PPO is used to compare the performance and volatility of assets, detect divergences that could lead to price reversals, generate trade signals, and help confirm the direction of the trend.
- The PPO generally contains two lines: the PPO line and the signal line. The signal line is an EMA of the PPO, so it moves slower than the PPO.
- Some traders use the PPO that crosses the signal line as a trading signal. When it crosses up from below, that is a buy, and when it crosses down from above, that is a sell.
- When the PPO is above zero, that helps to 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 long-term average, which helps indicate a downtrend.
Formula and calculation of the percentage price oscillator (PPO)
Use the following formula to calculate the relationship between two moving averages for a holding.
PPO=26-period EMA12-period EMA–26-period EMA×1Signal line=9-period PPO EMAPPO Histogram=PPO–Signal linewhere:EMA=Exponential moving average
- Calculate the 12-period EMA of the asset’s price.
- Calculate the 26-period EMA of the asset’s price.
- Apply them to the PPO formula to get the current value of PPO.
- Once there are at least nine PPO values, generate the signal line by calculating the nine-period EMA of the PPO.
- To generate a histogram reading, take the PPO value and subtract the value from the current signal line. The histogram is an optional visual representation of the distance between these two lines.
How the percentage price oscillator (PPO) works
The PPO is identical to the Moving Average Convergence Divergence Indicator (MACD), except that the PPO measures the percentage difference between two EMAs, while the MACD measures the absolute difference (in dollars). Some traders prefer the PPO because the readings are comparable between
assets with different prices, while MACD readings are not comparable. For example, regardless of the asset’s price, a PPO result of 10 means that the short-term average is 10% higher than the long-term average.
The PPO generates trading signals in the same way that the MACD does. The indicator generates a buy signal when the PPO line crosses above the signal line from below and generates a sell signal when the PPO line crosses below the signal from above. The signal line is created by taking a nine-period EMA from the PPO line. Signal line crossovers are used in conjunction with the point where the PPO is relative to zero / center line.
When the PPO is above zero, that helps confirm an uptrend, as the short-term EMA is above the longer-term EMA. Conversely, 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 the buy signals from the signal line when the PPO is above zero, or the price shows a general upward trajectory. Similarly, when the PPO is below zero, they may ignore buy signals or only accept short sell signals.
Crossings of the center line also generate trade signals. Traders consider a move from the bottom to the top of the center line as bullish, and a move from the top to bottom of the center line as bearish. The PPO crosses the center line when the 12- and 26-period moving averages are crossed.
Traders can also use the PPO to look for technical divergences between the indicator and the price. For example, if the price of an asset reaches a higher high, but the indicator goes down, it may indicate that the bullish momentum is diminishing. Conversely, if the price of an asset hits a lower low but the indicator makes a higher low, it could suggest that the bears are losing traction and the price could rise soon.
Comparison of assets with the percentage price oscillator (PPO)
The percentage value of the PPO allows traders to use the indicator to compare different assets in terms of performance and volatility. This is particularly useful if the price of the assets varies significantly.
For example, a trader comparing Apple and Amazon could compare the oscillating range of the indicator for each stock to determine which is more volatile.
If the PPO range for Apple is between 3.25 and -5.80 over the last year, and the PPO range for Amazon is between 2.65 and -4.5, it is evident that Apple is more volatile because it has a range of 9.05 points compared to the 7.15 point rank from Amazon. This is a very rough comparison of the volatility between the two assets. The indicator only measures and reflects the distance between two moving averages, not the 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 one has more momentum. For example, if Apple has a PPO of three and Amazon has a PPO value of one, then Apple has had more recent strength as its short-term EMA is more above the long-term EMA.
The Percent Price Oscillator (PPO) vs the Relative Strength Index (RSI)
The PPO measures the distance between a short-term and long-term EMA. The Relative Strength Index (RSI) 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 to detect divergences and confirm trends. Indicators are calculated and interpreted differently, so each will provide different information to traders.
Limitations of the Percent Price Oscillator (PPO)
The PPO is prone to providing false crossover signals, both in terms of signal line crossovers and center line crossovers. Suppose the price is rising, but then moving sideways. The two EMAs will converge during the lateral period, which will likely result in a signal line crossover and potentially a center line crossover. However, the price has not reversed or changed direction, it just stopped. Traders using the PPO should keep this in mind when using the PPO to generate trading signals.
Two or more crossovers can occur before a strong price movement develops. Multiple crosses without significant price movement are likely to result in multiple losing trades.
The indicator is also used to detect divergences, which can portends a price reversal. However, divergence is not a time sign. It can last a long time and will not always result in a price reversal.
The indicator is made up of the distance between two EMAs (the PPO) and an EMA of the PPO (signal line). There is nothing inherently predictive about these calculations. They show what has happened and not necessarily what will happen in the future.