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. To calculate the PPO, subtract the 26-period exponential moving average (EMA) from the 12-period EMA, and then divide this difference by the 26-period EMA. The result is then multiplied by 100. The indicator tells the trader where the short-term average is relative to the longer-term average.

Here is the PPO calculation:

{(12-day EMA – 26-day EMA) / 26-day EMA} x 100

BREAKING DOWN 'Percentage Price Oscillator - PPO'

The PPO and the moving average convergence divergence (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 exponential moving averages, whereas the PPO expresses this difference as a percentage. This allows a trader to use the PPO indicator to compare stocks with different prices more easily. For example, regardless of the stock's price, a PPO result of 10 means the short-term average is 10% above the long-term average.

Example of Percentage Price Oscillator                                                                                             

Image depicting an example of the PPO indicator.

Comparing Securities

The PPO’s percentage values allow traders to use the indicator to compare different securities easily. This is particularly useful if the securities vary significantly in price. For example, A trader who is comparing Apple, which is trading at $160, and Amazon, which is trading at $1,460, could compare the indicator’s oscillating range for each stock to determine which one is more volatile. For instance, if the PPO’s range for Apple is between -3 and +3, and Amazon’s PPO range is between -2 and +3, it is evident that Apple is more volatile because it has a 6 point range compared to Amazon’s 5 point range. The PPO indicator is also useful for comparing momentum between securities. Traders simply need to look at which stock has the higher PPO value. 

Trading with the Percentage Price Oscillator

The PPO generates trading signals in the same way the MACD does. The indicator generates a buy signal when the PPO line crosses the trigger line from below to above, and a sell signal when PPO line crosses the trigger line from above to below. The trigger line is created by taking a 9-period moving average of the PPO line (see example above.)

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 use the PPO to look for technical divergence between the indicator and price. For example, If the price of a security makes a higher high, but the indicator makes a lower high, it may indicate the bullish momentum is subsiding. Conversely, if a security’s price makes a lower low, but the indicator makes a shallower low, it could suggest that the bears are losing their traction. (For further reading, see: How Do I use the Price Percentage Oscillator (PPO) to create a forex trading strategy?)

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