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.
- 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.
PPO=26-period EMA12-period EMA−26-period EMA×100Signal Line=9-period EMA of PPOPPO Histogram=PPO−Signal Linewhere:
- Calculate the 12-period EMA of the asset's price.
- Calculate the 26-period EMA of the asset's price.
- Apply these to the PPO formula to get the current PPO value.
- 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, 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.
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.
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, then 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.