Skip to main content
diversification.com
← Back to P Definitions

Ppo

PPO: Percentage Price Oscillator

The Percentage Price Oscillator (PPO) is a technical indicator used in technical analysis to measure momentum and identify changes in the direction and strength of a price trend. It is an oscillators that expresses the difference between two moving average as a percentage of the longer moving average, making it useful for comparing asset price across different securities or timeframes regardless of their absolute price levels. The PPO typically consists of a PPO line, a signal line, and a histogram.

History and Origin

The Percentage Price Oscillator was developed by Gerald Appel in the late 1970s, the same individual credited with creating the well-known Moving Average Convergence Divergence (MACD) indicator. Appel introduced these tools to help traders and analysts better understand market momentum and potential changes in trend. While MACD presents absolute differences between moving averages, Appel recognized the need for a percentage-based version, leading to the creation of the PPO. This percentage-based approach allows for more direct comparisons of momentum across assets with vastly different price scales.

Key Takeaways

  • The PPO is a technical indicator that measures momentum by showing the percentage difference between two exponential moving average (EMAs).
  • It consists of the PPO line, a signal line (an EMA of the PPO line), and a histogram representing the difference between the PPO line and the signal line.
  • Positive PPO values indicate upward momentum, while negative values suggest downward momentum.
  • PPO is particularly useful for comparing volatility and momentum across different securities, as its percentage output normalizes values.7
  • Crossovers of the PPO line and its signal line, as well as divergences with price, can generate trading signals.

Formula and Calculation

The Percentage Price Oscillator (PPO) is calculated using two exponential moving averages, typically a shorter-period EMA and a longer-period EMA. The standard parameters are often a 12-period EMA and a 26-period EMA, followed by a 9-period EMA for the signal line.

The formula for the PPO is:

PPO=(Short-Period EMA−Long-Period EMALong-Period EMA)×100\text{PPO} = \left( \frac{\text{Short-Period EMA} - \text{Long-Period EMA}}{\text{Long-Period EMA}} \right) \times 100

Where:

  • Short-Period EMA = The exponential moving average of the asset's price over a shorter period (e.g., 12 periods).
  • Long-Period EMA = The exponential moving average of the asset's price over a longer period (e.g., 26 periods).

The signal line is then calculated as an exponential moving average of the PPO line itself, typically using a 9-period setting:

Signal Line=EMASignal Period(PPO)\text{Signal Line} = \text{EMA}_{\text{Signal Period}}(\text{PPO})

The histogram represents the difference between the PPO line and the signal line:

Histogram=PPO−Signal Line\text{Histogram} = \text{PPO} - \text{Signal Line}

Interpreting the PPO

Interpreting the PPO involves analyzing its relationship to the zero line, its signal line crossovers, and its divergence with asset price. When the PPO line is above the zero line, it indicates that the shorter-period exponential moving average is above the longer-period EMA, suggesting upward momentum and a bullish trend. Conversely, a PPO line below the zero line signifies that the shorter-period EMA is below the longer-period EMA, indicating downward momentum and a bearish trend.

Crossovers between the PPO line and its signal line are common trading signals. A bullish crossover occurs when the PPO line crosses above its signal line, often interpreted as a buy signal. A bearish crossover happens when the PPO line crosses below its signal line, interpreted as a sell signal. Additionally, divergence between the PPO and asset price (e.g., price makes a higher high, but PPO makes a lower high) can suggest a weakening trend and potential reversal.

Hypothetical Example

Consider a hypothetical stock, "GrowthCo Inc.," with the following exponential moving average values:

  • 12-period EMA: $105.00
  • 26-period EMA: $100.00
  • Previous PPO values (for 9-period Signal Line calculation) are already plotted.

To calculate the PPO for GrowthCo Inc.:

PPO=($105.00−$100.00$100.00)×100=($5.00$100.00)×100=0.05×100=+5%\text{PPO} = \left( \frac{\$105.00 - \$100.00}{\$100.00} \right) \times 100 = \left( \frac{\$5.00}{\$100.00} \right) \times 100 = 0.05 \times 100 = +5\%

This PPO value of +5% indicates that the short-term momentum is 5% higher than the long-term momentum. If the signal line (e.g., a 9-period EMA of the PPO) was, for instance, +4% and the PPO line just crossed above it, this could be interpreted as a bullish trading signals. A histogram would then show a positive bar, representing the difference between +5% and +4%. This positive reading suggests that GrowthCo Inc. is experiencing increasing upward pressure on its asset price.

Practical Applications

The PPO serves several practical applications in market analysis for investors and traders. Its primary use is identifying momentum shifts and trend changes in securities. Because it normalizes price movements into percentages, it is particularly effective for comparing the relative strength and volatility of different stocks, commodities, or currencies, regardless of their nominal values. For example, a PPO reading of +2% for a $10 stock means the same relative momentum as a +2% reading for a $1,000 stock, which is not true for absolute price oscillators like MACD.6

Traders use PPO to generate trading signals based on signal line crossovers and zero-line crossovers. A move above the zero line can signal the beginning of an uptrend, while a cross below may indicate the start of a downtrend. Furthermore, the PPO's ability to reveal divergence or convergence between the indicator and asset price can offer early warnings of potential trend reversals or continuations.5 This makes it a valuable tool when constructing a diversified portfolio, as understanding the underlying momentum of individual assets is crucial.

Limitations and Criticisms

While the Percentage Price Oscillator (PPO) is a valuable technical indicator, it shares some inherent limitations with other oscillators and technical analysis tools. One significant drawback is its lagging nature. Since PPO is derived from moving average of past asset price data, it inherently signals changes after they have already begun. This can lead to delayed trading signals, causing traders to miss the initial phase of a trend or experience "whipsaws" in choppy, non-trending markets where false signals are frequent.4

Another criticism stems from the Efficient Market Hypothesis (EMH), which posits that all available information is already reflected in asset price, making it impossible to consistently "beat the market" using historical price data.3 Therefore, critics argue that patterns identified by the PPO may not offer a predictive edge. Additionally, the effectiveness of PPO, like many technical indicators, can be subjective, as different traders may use varying period settings for the exponential moving average or interpret signals differently. It is not a standalone tool and should ideally be used in conjunction with other forms of market analysis to validate signals and manage risk.

PPO vs. MACD

The Percentage Price Oscillator (PPO) and the Moving Average Convergence Divergence (MACD) are both momentum oscillators developed by Gerald Appel, and they share a similar underlying calculation. Both indicators derive their values from the difference between two exponential moving average of an asset price, and both utilize a signal line (an EMA of the oscillator itself) and a histogram. The key distinction, however, lies in how this difference is presented.

  • PPO (Percentage Price Oscillator): The PPO expresses the difference between the short-period and long-period EMAs as a percentage of the longer-period EMA. This percentage-based calculation normalizes the oscillator's values, making it possible to compare momentum across different securities, regardless of their absolute price levels. For example, a PPO reading of +3% means the same relative strength for a low-priced stock as it does for a high-priced stock.2
  • MACD (Moving Average Convergence Divergence): The MACD, conversely, presents the difference between the two EMAs as an absolute value. This means the MACD reading for a high-priced stock will naturally be much larger than for a low-priced stock, even if their relative momentum is similar. This characteristic can make direct comparisons of MACD values across different asset price challenging without context.

While both indicators aim to provide similar trading signals related to convergence and divergence, the PPO's percentage scaling offers an advantage for cross-asset comparisons, a feature often overlooked when only using the MACD.1

FAQs

What does a positive or negative PPO value mean?

A positive PPO value indicates that the shorter-term exponential moving average of an asset price is above the longer-term exponential moving average, suggesting upward momentum and a bullish trend. A negative PPO value means the opposite: the shorter-term EMA is below the longer-term EMA, signaling downward momentum and a bearish trend.

How do traders use PPO signal line crossovers?

Traders often look for signal line crossovers to generate trading signals. A buy signal may be indicated when the PPO line crosses above its signal line, suggesting increasing bullish momentum. Conversely, a sell signal might occur when the PPO line crosses below its signal line, indicating weakening bullish or strengthening bearish momentum.

Can PPO predict future prices with certainty?

No technical indicator, including the PPO, can predict future prices with certainty. The PPO is a tool to help analyze past price action and identify potential trend and momentum shifts based on probabilities. It should be used as part of a broader market analysis strategy and not as the sole basis for investment decisions, especially given its lagging nature.