Trading Software

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.

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

The materials presented on this website are solely for informational purposes and are not intended as investment or trading advice. Suggested reading materials are created by outside parties and do not necessarily reflect the opinions or representations of Capital Market Services LLC. Please refer to our risk disclosure page for more information.