Trading with the Percentage Price Oscillator (PPO)

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    1st Place! Best Binary Broker 2020!
    Best Choice for Beginners — Free Education + Free Demo Acc!
    Sign-up and Get Big Bonus:

  • Binomo
    Binomo

    2nd place! Good choice!

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

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    1st Place! Best Binary Broker 2020!
    Best Choice for Beginners — Free Education + Free Demo Acc!
    Sign-up and Get Big Bonus:

  • Binomo
    Binomo

    2nd place! Good choice!

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.

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.

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.

Comparing Stocks With the Percentage Price Oscillator (PPO)

Learn how to use the Percentage Price Oscillator (PPO) to compare stocks, as it can show both trend direction and increasing price momentum.

PPO Versus MACD

The Percentage Price Oscillator (PPO) is not a highly utilized indicator, but most traders have heard of or used the MACD (moving average convergence divergence). The two indicators are nearly identical, except that the PPO is scaled using percentages, while MACD is based on price.

That means that PPO readings are comparable across all stocks, while the MACD readings are not.

Consider a stock that is trading near $70. Its price movements are going to be smaller than a stock that trades near $300. The $70 stock may have a peak (daily chart) MACD readings of $2, while the $300 stock has peak readings near $9. Not easily comparable.

Recall, that the MACD, and the PPO, are measuring the distance between a 12-period and 26-period moving average. As the price of a stock accelerates up or down, the moving averages move apart, since the shorter one moves faster than the longer one. MACD measures this distance in dollars. PPO measures the difference in percentage.

Since percentages are comparable, no matter what the stock price is, PPO is a useful tool for comparing momentum between stocks.

Using PPO To Compare Stocks

If one stock has a PPO reading of 1 and another has a reading of 2, that means the one with the reading of 2 has had more recent upside momentum, since the moving averages within the PPO calculation have moved a further distance apart.

This doesn’t necessarily mean we jump into the higher momentum stock. We still need a valid trade setup and we will want to check the chart to make sure that it is in an uptrend if that is what we are looking for.

That said, the PPO is a quick way to filter through stocks. A PPO reading above 0 means that the shorter-term moving average is above the longer-term moving average. Therefore, a reading above 0 is a very crude filter for finding stocks in recent uptrends. Recent is the key word. The stock could actually be declining in price for the last year, but could temporarily pop above o on a bear market rally.

The charts below show two banking stocks. Both charts look fairly similar, yet the PPO can quickly identify a few differences.

PPO (12,26) Comparison

Bank of America (BAC) on the right had a much stronger rally coming off the 2020 lows. Its PPO went above 11, while JPMorgan Chase (JPM) stayed below 8. At the time of the screenshot, the JPM PPO is below 0, while the BAC PPO is above 0. Within seconds, without measuring anything, it is clear to see that BAC has been the stronger stock overall.

Things may change in the future, but in the past and currently, the PPO shows which stock is the better performer and which stock has had the bigger upside moves.

A similar process can be undertaken when comparing any two or more stocks.

Note: the yellow line on the PPO indicator is the signal line (9). It is simply a 9-period moving average of the PPO line, which some traders use to generate trade signals, similar to the MACD.

Final Word On the Percentage Price Oscillator (PPO)

Using the PPO is not mandatory. It is an additional tool you can use if you find it helps filter your trades and gives you more clarity. While the PPO can help clarify some questions, it won’t always provide the right answer. A rapid price rise will cause a spike in the PPO, yet one spike in price or the PPO doesn’t necessarily mean the stock is worth trading. We still want to look at the overall picture of how a stock is doing before we trade it.

Don’t rely too heavily on the indicator. Studying the actual price will reveal much more about the trend than the indicator. Even if the PPO looks really good compared to another stock, always wait for a valid entry, plan your exit before taking the trade, and control your position size.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    1st Place! Best Binary Broker 2020!
    Best Choice for Beginners — Free Education + Free Demo Acc!
    Sign-up and Get Big Bonus:

  • Binomo
    Binomo

    2nd place! Good choice!

Like this post? Please share to your friends:
Binary Options Trading Wiki
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: