Price Percentage Oscillator (PPO)

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Introduction

The Percentage Price Oscillator (PPO) is a cousin of The MACD, so is a trend follower. The Percentage Price Oscillator (PPO) is a momentum oscillator that measures the difference between two moving averages as a percentage of the larger moving average. The signals associated with MACD are the same in PPO, so you could say The PPO is a percentage version of the MACD. Buy/sell situations, as in the below HPQ chart, are still triggered on zero line crossovers (1), signal line crossovers (2), PPO/Price divergence (3) and PPO histogram divergence's (4). So PPO, as MACD, is a momentum change indicator. As the trigger signals and divergences are equivalent to MACD, we won't go into great detail here, so it's a good idea to go back over Trading with MACD to get a better understanding of these signals.

Price Percentage Oscillator Signals
The PPO signals detailed above are the same as MACD

The PPO formula: 

PPO = ((12-period EMA minus 26-period EMA)/26-period EMA) x 100 
Signal and Histogram are calculated the same as MACD 

The PPO measures the percentage difference of the 2 EMA’s and as with the MACD the default EMA attributes are the 12 & 26-Period EMA's. It therefore measures relative strength of the asset. This allows us to compare the Relative strength of our asset with another asset. E.g. compare the relative strength of The FTSE with Rolls royce. Also, the relative strength of price momentum of our market can be measured and compared over long periods of time even if price has quadrupled in our market. This helps to identify over bought or over sold signals. However, movements in this oscillator are technically unlimited, so limited level oscillators like RSI and the Stochastic Oscillator are generally better at determining relative strength.

How to Chart The PPO

As with MACD, the PPO reflects the convergence and divergence of two moving averages. Let's look at the below Apple Chart. The PPO is positive when the shorter moving average is above the longer moving average. The indicator moves further north as the shorter moving average distances itself from the longer moving average. This reflects strong upside momentum. The PPO is negative when the shorter moving average is below the longer moving average. Negative readings grow when the shorter moving average distances itself from the longer moving average (goes further negative). This reflects strong downside momentum. The histogram represents the difference between PPO and its 9-day EMA, the signal line. The histogram is positive when PPO is above its 9-day EMA and negative when PPO is below its 9-day EMA. The PPO-Histogram can be used to anticipate signal line crossovers in the PPO.

Price Percentage Oscillator Histogram
Charting The PPO

How PPO Measures Relative Strength in a Market Over Time

The chart is similar to charting The MACD. However, The MACD is measuring absolute differences in price, so it will oscillate with higher and lower values when the price of the market is high and will oscillate with lower values when the price is low. This makes it hard to compare relative price strength over time. However The PPO measures the percentage price momentum change, which can be measured with itself over time. Let's look at the below APPLE Inc weekly chart. The MACD increases in value from 2004 on wards, hitting it's peak in early 2012, but we can see by utilising The PPO that even though price is $605 price momentum change was never higher than in late 2004.  This is why we can compare the relative price strength between different points in time.

Price Percentage Oscillator
PPO and MACD and how they differ when measuring relative price over time

Let's look at another example. In the below chart we’ve drawn the PPO and MACD together for one security. At first glance they look the same, but we can see that in Oct and Dec the PPO broke below the previous low in Aug and the MACD hasn’t yet broken that low. The lower lows in PPO show price momentum is still increasing downwards. The PPO is comparing relative momentum between price measured at differing dates and can be used to complement MACD. We can see it's a more effective way of comparing price momentum strength over time visually. As a note, when the PPO starts to travel towards 10% some traders' will say that it’s becoming over bought or sold. 

Percentage Price Oscillator versus MACD

How The PPO can Measure Relative Strength Between Two Different Markets

The PPO can be used to compare the strength of price momentum between two different markets, allowing traders to make informed decisions on which markets are most likely to have strong trading prospects going forward and which markets are volatile.  As of late May 2010, DELL was trading in the high teens and HPQ was trading in the mid 40s. The absolute price level has nothing to do with fundamentals, but it does affect the level of MACD. HPQ will no doubt have a higher MACD than DELL. However, we can apply the Percentage Price Oscillator (PPO) to compare momentum. First, notice that the PPO for DELL ranges from -4 to +4 for an 8 point range). The PPO for HPQ ranges from -3 to +2 for a range of 5. Right off the bat we can see that DELL is more volatile than HPQ because its PPO range is greater. Second, we can see that upside momentum for DELL was stronger than HPQ in March-April. The PPO for DELL advanced from negative territory and exceeded 4. The PPO for HPQ turned positive before the PPO for DELL, but did not exceed 1.6.

Price Percentage Oscillator comparing markets
A Comparison of Relative Strength between Different Markets

So in a nutshell what does this tell us? Only that Dell had stronger upside price momentum on these dates and it was more volatile - which can be incorporated into your reward to risk strategy. It may also be useful in determining which market to enter on the next trading signal, i.e If your strategy incorporates greater volatility, then Dell maybe the market the choose.

To Sum Up

PPO may not be the best oscillator to identify overbought or oversold conditions as movements are, in theory, unlimited. Levels for RSI and the Stochastics are limited and this makes them better suited to identify overbought and oversold levels.

We can set the indicators sensitivity too. As we can see in the below chart, the sensitivity of the indicator determines how quickly the trader enters the market and how accurate these trading signals are. If the indicator is set to low sensitivity then you generate less false signals, but you may see the move too late, or not see it at all. With high sensitivity you are more likely to catch the move into the trade, but more signals will be generated and more of them will be false.  For instance a swing trader (trading with a horizon of 4 to 5 days) may set the PPO to 3, 10, 16 once they've drill down to an hourly chart from a daily chart. Good charting software will allow the parameters to be changed. 

Adjusting The Sensitivity of The PPO Price Percentage Oscillator
Adjusting The Sensitivity of The PPO Parameters


Technical analysis is not an exact science and although these indicators can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

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Introduction

The Percentage Price Oscillator (PPO) is a cousin of The MACD, so is a trend follower. The Percentage Price Oscillator (PPO) is a momentum oscillator that measures the difference between two moving averages as a percentage of the larger moving average. The signals associated with MACD are the same in PPO, so you could say The PPO is a percentage version of the MACD. Buy/sell situations, as in the below HPQ chart, are still triggered on zero line crossovers (1), signal line crossovers (2), PPO/Price divergence (3) and PPO histogram divergence's (4). So PPO, as MACD, is a momentum change indicator. As the trigger signals and divergences are equivalent to MACD, we won't go into great detail here, so it's a good idea to go back over Trading with MACD to get a better understanding of these signals.

Price Percentage Oscillator Signals
The PPO signals detailed above are the same as MACD

The PPO formula: 

PPO = ((12-period EMA minus 26-period EMA)/26-period EMA) x 100 
Signal and Histogram are calculated the same as MACD 

The PPO measures the percentage difference of the 2 EMA’s and as with the MACD the default EMA attributes are the 12 & 26-Period EMA's. It therefore measures relative strength of the asset. This allows us to compare the Relative strength of our asset with another asset. E.g. compare the relative strength of The FTSE with Rolls royce. Also, the relative strength of price momentum of our market can be measured and compared over long periods of time even if price has quadrupled in our market. This helps to identify over bought or over sold signals. However, movements in this oscillator are technically unlimited, so limited level oscillators like RSI and the Stochastic Oscillator are generally better at determining relative strength.

How to Chart The PPO

As with MACD, the PPO reflects the convergence and divergence of two moving averages. Let's look at the below Apple Chart. The PPO is positive when the shorter moving average is above the longer moving average. The indicator moves further north as the shorter moving average distances itself from the longer moving average. This reflects strong upside momentum. The PPO is negative when the shorter moving average is below the longer moving average. Negative readings grow when the shorter moving average distances itself from the longer moving average (goes further negative). This reflects strong downside momentum. The histogram represents the difference between PPO and its 9-day EMA, the signal line. The histogram is positive when PPO is above its 9-day EMA and negative when PPO is below its 9-day EMA. The PPO-Histogram can be used to anticipate signal line crossovers in the PPO.

Price Percentage Oscillator Histogram
Charting The PPO

How PPO Measures Relative Strength in a Market Over Time

The chart is similar to charting The MACD. However, The MACD is measuring absolute differences in price, so it will oscillate with higher and lower values when the price of the market is high and will oscillate with lower values when the price is low. This makes it hard to compare relative price strength over time. However The PPO measures the percentage price momentum change, which can be measured with itself over time. Let's look at the below APPLE Inc weekly chart. The MACD increases in value from 2004 on wards, hitting it's peak in early 2012, but we can see by utilising The PPO that even though price is $605 price momentum change was never higher than in late 2004.  This is why we can compare the relative price strength between different points in time.

Price Percentage Oscillator
PPO and MACD and how they differ when measuring relative price over time

Let's look at another example. In the below chart we’ve drawn the PPO and MACD together for one security. At first glance they look the same, but we can see that in Oct and Dec the PPO broke below the previous low in Aug and the MACD hasn’t yet broken that low. The lower lows in PPO show price momentum is still increasing downwards. The PPO is comparing relative momentum between price measured at differing dates and can be used to complement MACD. We can see it's a more effective way of comparing price momentum strength over time visually. As a note, when the PPO starts to travel towards 10% some traders' will say that it’s becoming over bought or sold. 

Percentage Price Oscillator versus MACD

How The PPO can Measure Relative Strength Between Two Different Markets

The PPO can be used to compare the strength of price momentum between two different markets, allowing traders to make informed decisions on which markets are most likely to have strong trading prospects going forward and which markets are volatile.  As of late May 2010, DELL was trading in the high teens and HPQ was trading in the mid 40s. The absolute price level has nothing to do with fundamentals, but it does affect the level of MACD. HPQ will no doubt have a higher MACD than DELL. However, we can apply the Percentage Price Oscillator (PPO) to compare momentum. First, notice that the PPO for DELL ranges from -4 to +4 for an 8 point range). The PPO for HPQ ranges from -3 to +2 for a range of 5. Right off the bat we can see that DELL is more volatile than HPQ because its PPO range is greater. Second, we can see that upside momentum for DELL was stronger than HPQ in March-April. The PPO for DELL advanced from negative territory and exceeded 4. The PPO for HPQ turned positive before the PPO for DELL, but did not exceed 1.6.

Price Percentage Oscillator comparing markets
A Comparison of Relative Strength between Different Markets

So in a nutshell what does this tell us? Only that Dell had stronger upside price momentum on these dates and it was more volatile - which can be incorporated into your reward to risk strategy. It may also be useful in determining which market to enter on the next trading signal, i.e If your strategy incorporates greater volatility, then Dell maybe the market the choose.

To Sum Up

PPO may not be the best oscillator to identify overbought or oversold conditions as movements are, in theory, unlimited. Levels for RSI and the Stochastics are limited and this makes them better suited to identify overbought and oversold levels.

We can set the indicators sensitivity too. As we can see in the below chart, the sensitivity of the indicator determines how quickly the trader enters the market and how accurate these trading signals are. If the indicator is set to low sensitivity then you generate less false signals, but you may see the move too late, or not see it at all. With high sensitivity you are more likely to catch the move into the trade, but more signals will be generated and more of them will be false.  For instance a swing trader (trading with a horizon of 4 to 5 days) may set the PPO to 3, 10, 16 once they've drill down to an hourly chart from a daily chart. Good charting software will allow the parameters to be changed. 

Adjusting The Sensitivity of The PPO Price Percentage Oscillator
Adjusting The Sensitivity of The PPO Parameters


Technical analysis is not an exact science and although these indicators can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

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