The percentage price oscillator (PPO) is a momentum indicator that displays the percentage link in both two moving averages. The moving averages are a 26-period exponential moving average as well as a 12-period moving average (EMA).
The PPO is being used to assess asset performance and volatility, identify the divergence that could lead to price reversals, produce trade signals, and assist in trend direction.
Percentage Price Oscillator Formula
PPO = [(12-period EMA−26-period EMA) / 26-period EMA]*100
Signal Line=9-period EMA of PPO
PPO Histogram=PPO−Signal Line
EMA=Exponential moving average
How to calculate Percentage Price Oscillator?
- Compute the asset’s price’s 12-period EMA.
- Compute the asset’s price’s 26-period EMA.
- To find the current PPO value, plug these into the PPO formula.
- Create the signal line by computing the PPO’s nine-period EMA after there are at least nine PPO values.
- Take the PPO value and subtract the current signal line value to get a histogram reading. The histogram is a visual depiction of the distance between these two lines that can be used if desired.
How does Percentage Price Oscillator work?
The PPO is similar to the moving average convergence divergence (MACD) indicator, with the exception that the PPO measures the percentage distinction between two EMAs, whereas the MACD calculates the absolute (dollar) difference. Some traders prefer the PPO because the readings can be compared across assets with varying prices, whereas the MACD readings cannot. A PPO value of 10 shows the short-term average is 10% higher than the long-term average, regardless of the asset’s price.
In the same way that the MACD does, the PPO provides trade signals. When the PPO line crosses above the signal line from below, the indicator generates a buy signal, and when the PPO line crosses below the signal line from above, the indicator generates a sell signal. A nine-period EMA of the PPO line is used to construct the signal line. Signal line crossovers are used to determine the position of the PPO in relation to zero/centerline.
The fact that the short-term EMA is above the longer-term EMA helps confirm an uptrend when the PPO is above zero. When the PPO is lower than zero, the short-term EMA is lower than the longer-term EMA, indicating a downtrend. When the PPO is above zero or the price is on an upward trend, some traders choose to take signal line buy signals. They may also disregard buy signals or only take short-sell indications when the PPO is below zero.
Trading signals are also generated by centerline crossovers. A move from below to above the centerline is considered bullish, while a move from above to below the centerline is considered bearish. When the 12-period and 26-period moving averages cross, the PPO crosses the midline.
Traders can also check for technical divergence between the indicator and the price using the PPO. If the price of an asset achieves a higher high but the indicator makes a lower high, this could indicate that the upward momentum is fading. In contrast, if the price of an asset makes a lower low but the indicator produces a higher low, it could indicate that the bears are losing grip and the price is about to rise.
The drawback of the Percentage Price Oscillator
In terms of both signal line and centerline crossovers, the PPO is prone to producing erroneous crossover signals. Assume that the price initially rises before moving sideways. During the sideways phase, the two EMAs will converge, leading in a signal line crossover and maybe a centerline crossover. However, the price has only stalled, not reversed or changed direction. When using the PPO to generate trade signals, traders should keep this in mind.
Before a major price move develops, two or more crossovers may occur. Several crosses without a major price change will almost certainly result in multiple losing transactions.
Divergences, which may indicate a price reversal, are also detected using the indicator. Divergence, on the other hand, is not a time signal. It can last a long time and isn’t necessarily followed by a price change.
The distance between two EMAs (the PPO) and an EMA of the PPO make up the indicator (signal line). These computations don’t have anything intrinsically predictive about them. They are depicting what has happened in the past, not necessarily what will occur in the future.
Disclaimer: There are potential risks relating to trading and investing and you should not trade with money that you cannot afford to lose however, for those that educate themselves and adopt appropriate risk management strategies, the potential update can be significant. Please note that all opinions, research, analysis, and other information are provided as general market commentary and not as specific investment advice.
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