PPO — Percentage Price Oscillator

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Percentage Price Oscillator

Table of Contents

Percentage Price Oscillator

Introduction

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. As with its cousin, MACD, the Percentage Price Oscillator is shown with a signal line, a histogram and a centerline. Signals are generated with signal line crossovers, centerline crossovers, and divergences. Because these signals are no different than those associated with MACD, this article will focus on a few differences between the two. First, PPO readings are not subject to the price level of the security. Second, PPO readings for different securities can be compared, even when there are large differences in the price. See the ChartSchool article on MACD for information on signals common to both MACD and PPO.

Calculation

While MACD measures the absolute difference between two moving averages, PPO makes this a relative value by dividing the difference by the slower moving average (26-day EMA). PPO is simply the MACD value divided by the longer moving average. The result is multiplied by 100 to move the decimal place two spots. The table below shows Intel (INTC) with values for the 12-day EMA, 26-day EMA, MACD and PPO. Intel is priced in the low 20s and MACD values range from -44 cents to +64 cents. PPO puts this in percentage terms with values ranging from -2.01 to +2.85. It is easier to compare levels over time with percentages. -2.01 is equivalent to -2.01%, while +2.85 is equivalent to +2.85%.

Standard PPO is based on the 12-day Exponential Moving Average (EMA) and the 26-day EMA, but these parameters can be changed according to investor or trader preferences. Closing prices are used to calculate the moving averages and, therefore, PPO signals should be measured against closing prices. A 9-day EMA of PPO is plotted as a signal line to identify upturns and downturns in the indicator.

Interpretation

As with MACD, the PPO reflects the convergence and divergence of two moving averages. PPO is positive when the shorter moving average is above the longer moving average. The indicator moves further into positive territory 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. See the ChartSchool article on the MACD Histogram for signal details.

MACD, PPO and Price

MACD levels are affected by the price of a security. A high-priced security will have higher or lower MACD values than a low-priced security, even if volatility is basically equal. This is because MACD is based on the absolute difference in the two moving averages. Chart 2 shows Google with MACD and PPO for comparative purposes. The 12-day EMA is around 495, the 26-day EMA is around 512 and the difference is -17 (double digits). Notice that Google’s MACD reached double digits on the upside and the downside, but the Percentage Price Oscillator ranged from +2.5 to -3.5. MACD values appear higher because Google is priced at a relatively high level. MACD for the Dow Industrials, which is above 10,000, hits triple digits on a regular basis. However, the PPO ranges from -2 to +2, which is a much more definable range.

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Although the indicator lines look the same, there are often subtle differences between MACD and PPO. In the Google example, notice how the PPO broke below the February low, but MACD has yet to break its February low. The lower low in the PPO shows expanding downside momentum.

Large Price Changes

Because MACD is based on absolute levels, large price changes can affect MACD levels over an extended period of time. If a stock advances from 20 to 100, its MACD levels will be considerably smaller, closer to 20 than 100. The PPO solves this problem by showing MACD values in percentage terms. Chart 3 shows Baidu (BIDU) advancing from 25 to 75 over a 12-month period. MACD values around 25-30 are going to be generally smaller than MACD values around 70-80. Notice that MACD broke above its July and March highs, but the PPO did not break these corresponding highs. Also note that Baidu becomes overbought when the PPO exceeds +5.

Comparing Different Securities

Because the Percentage Price Oscillator (PPO) is a percentage version of MACD, its values can be compared against other securities. Dell (DELL) and Hewlett Packard (HPQ) are in the same industry group, but their stock prices are at different levels. As of late May 2020, 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.

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Conclusion

The Percentage Price Oscillator (PPO) generates the same signals as the MACD, but provides an added dimension as a percentage version of MACD. The PPO levels of the Dow Industrials (price

11000) can be compared against the PPO levels of IBM (price

122) because the PPO “levels” the playing field, so to speak. In addition, PPO levels in one security can be compared over extended periods of time, even if the price has doubled or tripled. This is not the case for the MACD. Despite its advantages, the PPO is still not the best oscillator to identify overbought or oversold conditions because movements are unlimited (in theory). Levels for RSI and the Stochastic Oscillator are limited, making them better suited to identifying overbought and oversold levels.

Using with SharpCharts

The PPO can be set as an indicator above, below or behind a security’s price plot. Once the indicator is chosen from the dropdown list, the default parameter setting appears (12,26,9). These parameters can be adjusted to increase or decrease sensitivity. A slower long moving average combined with a faster short moving average will increase sensitivity. The histogram can be removed by setting the signal line parameter to 1. This is helpful when displaying the PPO behind the price plot of a security. Users can even add back the signal line by applying a 9-day EMA to the PPO. Click “advanced options” to add the moving average as an overlay for an indicator. Click here for a live example of the PPO.

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Suggested Scans

PPO Bullish Signal Line Cross

This scan reveals stocks that are trading above their 200-day moving average and have a bullish signal line crossover in the PPO. Notice that the PPO is required to be negative to ensure that this upturn occurs after a pullback. This scan is just meant as a starting point for further refinement.

PPO Bearish Signal Line Cross

This scan reveals stocks that are trading below their 200-day moving average and have a bearish signal line crossover in PPO. Notice that the PPO is required to be positive to ensure that this downturn occurs after a bounce. This scan is just meant as a starting point for further refinement.

For more details on the syntax to use for PPO scans, please see our Scan Syntax Reference in the Support Center.

Percentage Price Oscillator – An ‘Elegant Indicator’

Technical analysis – the practice of devising knowledge from stock charts – is almost unlimited in its complexity and potential for further complexity. You might well wonder why people would make stock picking so complicated. Why not just rely on the basic indicators, like whether the stock price is up or down? Well, those who use technical analysis are basically trying to disprove that boilerplate language found in disclaimers everywhere: «Past performance is not indicative of future results.»

One of the more sophisticated tools used in technical analysis is the percentage price oscillator, which measures momentum. To figure out what a percentage price oscillator is and why we’d care, we have to start with the concept of an exponential moving average (EMA), which is critical to many aspects of technical analysis.

Exponential Moving Average

The exponential moving average of a stock is nothing more than its average closing price over a certain number of days, with more recent days weighted more heavily – exponentially, in fact. That’s contrasted with a simple moving average, in which every day of the period counts equally.

When does a random uptick or downtick in a stock’s price become or portend a trend? In other words, how many days should you use to calculate an exponential moving average? The longer the period, the more methodical and gradual the exponential moving average’s journey will be. The shorter the period, the more closely the graph of the exponential moving average will resemble the graph of the stock’s unvarnished day-to-day price. An exponential moving average needs to be calculated over a period of appropriate length to maximize meaningful data while minimizing random movement.

Tradition and convention have deemed 26 days to be the dividing line between the short term and the «minor intermediate» term in the stock market, with the «very short» term lasting between five and 13 days. Perhaps that’s arbitrary, but it does give us a starting point and some underlying logic for working with exponential moving averages of varying lengths.

Calculating the Percentage Price Oscillator

The percentage price oscillator is simply the nine-day exponential moving average, decreased and then divided by the 26-day exponential moving average.

This isn’t intended as mere algebraic manipulation either – subtraction and division for their own sake. The idea is to look at the short-term average in comparison to the longer-term average, while staying impervious to the effects of sudden recent movements. Essentially, we’re looking at the nine-day average as a fraction of the 26-day average; hence, percentage price oscillator.

Take a look at the following chart. It shows the percentage price oscillator for Berkshire Hathaway Inc. (BRK.A), using the parameters listed above. The black line is the percentage price oscillator. The red line represents the nine-day exponential moving average, while the blue histogram indicates the difference between the red and black lines.

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In practice, the result of the calculation will be something like «+10%,» which would mean that the underlying security’s nine-day exponential moving average exceeds its 26-day counterpart by 10%. A positive number indicates an upward trend and a signal to buy.

By the way, nine- and 26-day exponential moving averages are not dictated by Scripture. Some analysts use 12 and 26 days, some use 10 and 30, and others use other combinations. Whatever lengths the analysts choose, they shouldn’t differ much from 9 and 26 days, which are the generally accepted lengths that define very short term and minor intermediate term. A percentage price oscillator calculated with 10- and 26-day exponential moving averages will be close in value to one calculated with nine- and 30-day exponential moving averages. The oscillators certainly won’t differ enough to turn a buy decision into a sell one.

The Elegant Indicator

One advantage to the percentage price oscillator is that it’s a dimensionless quantity, a pure number that isn’t fixed to a value such as the price of the underlying stock or other security. Also, because the percentage price oscillator compares two exponential moving averages, it lets the user compare movements through different time frames. The price of the security itself becomes almost of secondary importance. Unlike lots of other popular analytical tools, the percentage price oscillator measures relative price differences, not absolute ones.

For analysts who choose to use the percentage price oscillator, a value outside the range of -10% to +10% is supposed to indicate a stock being oversold or overbought, respectively.

The value of the percentage price oscillator is also an indicator of stock volatility, with a higher percentage indicating higher volatility. Volatility is a desirable condition in some instances and an undesirable one in others, but the theory goes that the percentage price oscillator is best used in conjunction with a buy or sell signal. 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.

The Bottom Line

The percentage price oscillator’s value is its ability to fuse trends of short and intermediate lengths into a single elegant ratio. On its own, it’s of limited worth, but when combined with knowledge of the market, an appreciation of fundamentals and an understanding of the difference between investing and speculation, prudent use of the percentage price oscillator can pay tangible rewards to the bright investor.

PPO — Percentage Price Oscillator

Percentage Price Oscillator (PPO) is a very close neighbor of MACD indicator.

PPO standard settings are similar to MACD settings: 12, 26, 9, and PPO, same as MACD shows the difference between the two Moving averages, with one difference, that PPO shows it in percents.

Trading with PPO is similar to trading with MACD indicator, with the same zero line crossover rules, divergence etc.

Reasons for using PPO instead of MACD

— by having the percentage measurement rather than price values (for example PPO = 3%), it becomes possible to compare currency pairs with their rising/falling % against each other, regardless the actual prices.

— PPO also offers a better interpretation of the two moving averages in relation to each other. Again, this absolute percentage value allows to make comparisons across time frames, regardless the market price.

Percentage Price Oscillator formula

PPO = (Shorter-term EMA – Longer-term EMA) / Longer-term EMA

Standard settings for PPO are: 12 period EMA, 26 period EMA, 9 period EMA (same as with MACD) but traders can use any other sets of Moving averages.

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