What is it?
The Percentage Price Oscillator (PPO) shows the momentum of price as a percentage.
It measures the difference between two moving averages as a percentage of the larger moving average. Not to be confused with the percentage volume oscillator (PVO), which is very similar, but shows the momentum of volume instead.
The Percentage Price Oscillator is related to the moving average convergence divergence (MACD); both are momentum indicators that are calculated in a similar way. The main difference between the two is the MACD shows just the difference between the moving averages, whereas the PPO expresses it as a percentage.
Advantages of PPO
- PPO readings are not subject to the price level of the security. As it is a percentage it is more accurate for volatile stocks with big price swings
- Stocks can be compared more easily, even when there are large difference or swings in the price of one of the stocks. This can also show us which stock is more volatile. 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.
Disadvantages of PPO
- Not great as an overbought/oversold indicator because movement is unlimited. Stochastic and RSI are therefore better overbought/oversold indicators
How is it calculated?
Percentage Price Oscillator = ((12 day EMA – 26 day EMA)/26 day EMA) x 100
- Calculate the 12 day exponential moving average of price and subtract the 26 day exponential moving average of price from it
- Divide by the 26 day exponential moving average of price
- Multiple by 100
The Signal Line is usually a 9 day EMA of PPO.
The Histogram is usually PPO minus the Signal Line.
How do you read it?
Like the MACD indicator the PVO is shown with a signal line, a histogram and a centreline. Signals are generated with signal line crossovers, centerline crossovers and divergences. Due to the fact that the PPO is calculated from moving averages, price action is essentially smoothed over and signals can lag. Short-term traders should therefore watch price closely or adjust the PPO settings to a shorter duration.
When the shorter EMA is above the longer EMA the PPO is positive. If the indicator moves further into positive territory with the shorter EMA accelerating faster than the longer moving average it reflects strong upside momentum.
When the shorter EMA is below the longer EMA the PPO is negative. If the indicator moves further into negative territory with the shorter EMA accelerating faster than the longer moving average it reflects strong downside momentum.
The histogram represents the difference between PPO and its signal line (the 9 day EMA). The histogram is positive when PPO is above its 9 day EMA and negative when PPO is below its 9 day EMA. The histogram can be used to anticipate signal line crossovers in the PPO.
On the chart above I have added both the MACD and the PPO for comparison (12,26,9). Though similar there are some slight differences. The key difference I have highlighted with purple commentary. You can see that in 2015 the MACD made a new high when it surpassed the 2014 high. In contrast the PPO did not.
I particularly chose this stock, Incyte Corp, because of the large price increase in a short space of time. Using the same chart above I have zoomed the chart out to a longer time-scale (see the chart below). The benefit of PPO is immediately obvious. The large price increase over this space makes it difficult to compare the MACD reading over this period of time. During this time the stock price more than triples in value. As the MACD is based on absolute numbers, the MACD gets bigger in value. The PPO in contrast is calculated as a percentage and therefore solves this problem.