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Percentage Price Oscillator

The Percentage Price Oscillator (PPO) is a momentum oscillator with some trend-following characteristics. It expresses the difference between two moving averages as a percentage value that quantifies where the fast moving average is in relation to the slow moving average. The Percentage Price Oscillator is very similar to the Moving Average Convergence/Divergence (MACD), except the MACD expresses the difference of two moving averages as an absolute value. Expressing the difference as a percentage value makes it easier to compare trading instruments with difference prices.

The PPO is calculated by the formula:

PPO = (fast moving average – slow moving average) / slow moving average

Sometimes an additional “signal” (trigger) line is then calculated from the PPO. The signal line is a moving average of the PPO. An additional histogram may also be calculated. The histogram is calculated as the difference between the PPO and its signal line.

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Interpretation

The Percentage Price Oscillator is widely used as a trend-following indicator and tends to work most effectively when measuring wide-swinging market movements. There are three basic techniques for using the PPO to generate trading signals.

PPO / Zero-Level Crossover: When the PPO crosses above zero a buy signal is given. Alternatively, when the PPO crosses below zero a sell signal is given.

PPO / Signal line Crossover: A buy signal occurs when the PPO crosses above its Signal line and a sell signal occurs when the PP crosses below its Signal line.

Divergence: Looking for divergences between the PPO and price can prove to be very effective in identifying potential reversal and/or trend continuation points in price movement. There are several types of divergences:

Classic Divergence (aka: Regular Divergence)

  • Bullish Divergence = Lower lows in price and higher lows in the PPO
  • Bearish Divergence = Higher highs in price and lower highs in the PPO

Hidden Divergence (aka: Reverse, Continuation, or Trend Divergence)

  • Bullish Divergence = Lower lows in PPO and higher lows in price
  • Bearish Divergence = Higher highs in PPO and lower highs in price

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