The price percent oscillator (PPO) is a must for the trend-following trader’s toolkit, tracking momentum using exponential moving averages for better signals.
- Price Percent Oscillator Calculation
- Price Percent Oscillator Histogram
- Trading the Price Percent Oscillator
- Conclusion
The price percent oscillator (PPO) is an indicator that’s predicated on moving averages and it was built to measure momentum. You might also hear it referred to as the percentage price oscillator, but whatever name it goes by, its job is to highlight shifts in price trends over time.
It uses moving averages, and the thinking behind them is that you can find trends by taking averages of historical closing price data. The price percentage oscillator uses exponential moving averages (EMAs) which give extra credence to the latest price information, using an exponential component.
A long EMA picks up more price information which makes it produce more moderate shifts. A shorter EMA will move more quickly, converging with the intraday price movement the further the period is shortened. The ideal EMA is one that is long enough to produce useful information whilst minimizing incorrect signals.
Price Percent Oscillator Calculation
The PPO isn’t so different from the moving average convergence divergence (MACD) indicator, using identical EMAs to do its work, taking the difference between the 26-period and 12-period EMAs. The trading week used to be six days long, which meant that the trading month lasted for 26 days and looking at a full trading month was deemed to be the best way to assess intermediate market trends. In the past, the 12-period EMA covered two trading weeks.
The indicator uses this formula:
(12-period EMA – 26-period EMA) / (26-period EMA)
It’s usual to take a 9-period EMA of the 26-/12-period differential EMA to track its trend. This is often referred to as the “trigger line” as some traders use it to generate signals. For instance, if the 26/12 line crosses north of the trigger line, this is thought of as a bull-type signal (upward momentum). Similarly, crossing the 26/12 beneath the trigger line can be seen as a bear-type signal (downward momentum).
It isn’t an absolute requirement to plot the 9-period EMA alongside the price percent oscillator because it doesn’t make a great contribution to the identification of the trend. It’s fine if you want to plot the price percent oscillator on its own and this might even make looking at the chart a bit easier, so don’t be afraid to do that if it helps you. Some traders use the spread over or under the 9-period EMA for momentum tracking, meaning that, if the 26/12 line is north of the 9-period EMA and the gap between them is expanding, momentum is positive and increasing.
A 26/12 line that’s moving upwards points to increasing momentum. The 12-period EMA is ascending more quickly than the 26-period EMA. This is pertinent because the 12-period EMA will be more sensitive to price adjustments than the 26-period EMA (as it uses fewer price data points and so fewer are factored into the calculation).
Remember that you can alter the periods used by the EMAs to arrive at the PPO. The 26-/12-period is the standard setup but you can choose whichever one suits you. As the periods lengthen, the indicator line will grow smoother.
Price Percent Oscillator Histogram
Some traders ditch the lines because they prefer to use a histogram to view the price percent oscillator. It takes a measurement of the distance between the 26/12 line and the 9-period EMA, so you’ll see that if you’ve got positive momentum then the histogram will be showing a value greater than zero. If momentum is showing a positive upswing, the histogram’s values will rise also.
If you like your trade signals to come from crossings of the trigger line then the PPO histogram is particularly useful.
Typically, this has been how people use the indicator, but traders who track momentum using the PPO line itself might not find it quite so helpful.
Trading the Price Percent Oscillator
Using the price percent oscillator with price reversal indicators could get pretty confusing, so it’s probably best to use it in tandem with other momentum indicators instead.
The PPO can track more medium-term trends well enough, but if you want to track a longer-term trend then it might be better to employ the likes of the simple moving average. The way to do this is to line up both momentum indicators at the same time. If you’ve got a moving average that’s sloping upwards and you’re seeing concurrent positive value shifts with the PPO then you can take these bullish signals as signs of support for long trades.
By the same token, a moving average with a negative slope and a PPO histogram with a negative value too would encourage you towards short trades.
You can see instances of setups for trades on this one-hour chart of the S&P 500. The bearish negative slope of the 200-period simple moving average points to short trading.
There are three setups in which each trade is made at the first price candle after the PPO histogram goes negative. (If this is being gauged with the standard PPO format (lines rather than histogram), we’d see the 26/12 line heading under the trigger line.) Each potential short trade is indicated by a red arrow inside a white circle. You exit the trade as the PPO slides from positive to negative.
There’s a question mark on the third trade to show that you’d be using your judgment to call this one. Since the 200-period moving average was starting to go flat, it’s difficult to tell which way the trend might be heading.
These are just examples, of course, merely used for illustration purposes and not to be taken as gospel. You can combine indicators and analysis for your own trades in any way that you see fit.
Conclusion
The price percent oscillator is a momentum indicator that you can configure to show either a line or a histogram. When it’s going up it’s a sign that momentum is also on the up, and this is just the kind of opportunity that you’re looking for if you are a trend following trader.
The PPO can also be used as an overall volume indicator. Bigger peaks and troughs and a greater number of fluctuations point to a greater volume, and if you believe the mantra that price follows volume then this could help your trades.
