What is Percentage Price Oscillator (PPO)?

Percentage Price Oscillator (PPO) is a momentum indicator (like MACD, EMA, and SMA) that looks at the relationship between two exponential moving averages (EMA) of an asset in percentage terms and compares it to another EMA called the signal line.

As a result, the PPO is very similar to Moving Average Convergence Divergence (MACD). The movement of the PPO oscillator above and below a signal line (usually another EMA) is then used to determine trading strategies.

Like with MACD, we use the closing prices of the asset.

How do you calculate Percentage Price Oscillator (PPO)?

The PPO indicator calculation is as follows:

PPO = ((12-period EMA - 26-period EMA)/26-period EMA) x 100 (where the time period is usually a day).

PPO = ((12-day EMA - 26-day EMA)/26-day EMA) x 100

This PPO line is then plotted against a signal line: the 9-day EMA of the PPO value.

The PPO histogram is the difference between the PPO line and the signal line.

If you need a refresher on the exponential moving average formula, click here. The EMA is a type of moving average that places greater weight on more recent data points.

How do you interpret Percentage Price Oscillator (PPO)?

In the image below, you can see an example PPO line. As the PPO line is calculated by looking at the percentage change between the 12-day EMA and the 26-day EMA, if 12-day EMA > 26-day EMA, then this represents a positive percentage change and hence the line will be above 0. If the 12-day EMA < 26-day EMA, then it would be a negative percentage change and hence the line would be below 0. The difference compared to MACD, is that PPO uses a percentage difference rather than an absolute dollar difference in MACD’s case.

As PPO is measured in relative terms, it’s also a measure of volatility. A higher % value of PPO indicates high volatility.

So why use PPO instead of MACD? As PPO is calculated in relative terms (%), you can use it to compare assets whereas you can’t compare assets with MACD. For example, if the PPO of Asset X ranged from -2 to 2 and the PPO of Asset Y ranged from -1 to 1 in the same time period, Asset X can be thought of as more volatile. Likewise, if the PPO of Asset X is currently 2 and the PPO of Asset Y is currently 1, then Asset X has strong positive momentum.

You can also use it to compare two different time frames of the same asset.

How do you interpret the PPO histogram?

If the PPO line is above the signal line, the histogram will be above the zero line and if the PPO line is below the signal line, the histogram will be below the zero line.

When the PPO line rises above the signal line, this could indicate a bullish signal. When the PPO line falls below the signal line, this could indicate a bearish signal.

How can you use Percentage Price Oscillator (PPO) in a stock trading strategy?

PPO is used in technical analysis in a variety of ways (similar to MACD).

PPO crossovers

A basic strategy is a PPO centerline crossover - This is when the PPO value moves above or below 0. According to Investopedia, “A high (positive) percentage price oscillator ought to encourage investors to buy only when coupled with an already extant signal derived via some other means. Similarly, a low (negative) percentage price oscillator should impel little action on its own, but it can reinforce a sell decision when a sell signal is already present.” [2]

One popular strategy is PPO signal line crossovers (or PPO crossover). When the PPO line crosses above the signal line, this can indicate a bullish signal and hence PPO can be used as a momentum indicator suggesting that there may be upward price action (bullish crossover). Conversely, when the PPO line crosses below the signal line, this can indicate a bearish signal and it could indicate downward price action (bearish crossover).

PPO divergence

What is PPO divergence in simple terms? Any divergence is when the price of the asset moves in a different direction to the oscillator (PPO histogram in this case). For example, if the price moves to a new low but the PPO histogram is moving in the opposite direction (or at least doesn’t reach a new low of it’s own), then this is called a bullish divergence and it can indicate a buy signal.

On the other hand, if there are price movements to a new high, but the PPO histogram is moving in the opposite direction, then this could indicate bearish divergence and a sell signal.

As a result, traders can use this an indicator of potential price reversals. However, it’s hard to know exactly how long this divergence could last before the price reversal.

PPO vs RSI

What’s the difference between RSI and PPO? While both are momentum indicators, RSI has ranges of values that can indicate if an asset has been overbought or oversold (e.g. >70 for overbought).

What are the limitations of Percentage Price Oscillator (PPO)?

PPO uses historical data and as the saying goes, past performance is not an indicator of future performance (PPO is a lagging indicator). If you believe that markets are efficient, then the current market price already reflects all available information and hence PPO doesn’t tell you anything more.

Another limitation of PPO divergence is that it can indicate a false positive or false signal (i.e. it indicates a trend reversal but that doesn’t happen). For example, if the price rises and then moves sideways for a while, the two EMAs will start to converge and there could be a signal line crossover but this doesn’t actually represent a price reversal.

In addition, PPO is not a timing signal so even if there is a divergence, it doesn’t help to understand how long it will be until the price reversal happens.

What are similar indicators to Percentage Price Oscillator (PPO)?

Other technical indicators related to PPO include:

• Moving Average Convergence Divergence (MACD) - The absolute version of PPO.

• Simple Moving Average (SMA) - A moving average indicator that places equal weight on all prior time periods.

• Exponential Moving Average (EMA) - While SMA places an equal weight on all time periods, the EMA places more weight on more recent time periods. The EMA is an example of a weighted moving average.

• Relative Strength Index (RSI) - RSI is another commonly used momentum indicator.

Sources

• https://www.investopedia.com/terms/p/ppo.asp

• https://www.investopedia.com/articles/investing/051214/use-percentage-price-oscillator-elegant-indicator-picking-stocks.asp [2]

• https://www.investopedia.com/terms/m/macd.asp#toc-what-is-moving-average-convergencedivergence-macd

• https://www.investopedia.com/terms/e/ema.asp

• https://www.investopedia.com/terms/s/sma.asp

• https://www.asktraders.com/gb/learn-to-trade/trading-strategies/macd/

• https://en.m.wikipedia.org/wiki/MACD