Percentage Price Oscillator (PPO) – Strategy, Rules, Returns

There are many types of indicators and tools traders can use to analyze the market, and one good one for comparing different markets is the percentage price oscillator (PPO). What do you know about this indicator?

Often written in the shortened form, PPO, the percentage price oscillator is a momentum indicator that shows the percentage difference between two moving averages — a 26-period and 12-period exponential moving average. Traders use it to compare the price movement of different assets, as well as estimate volatility in different markets.

In this post, we will take a look at most of the questions you may have about the PPO: what it is, how it is calculated, how it works, and how you can improve your trading strategies with it. Read on!

Key takeaways

• The Percentage Price Oscillator (PPO) is a momentum indicator that measures the percentage difference between a 26-period and a 12-period exponential moving average (EMA).Similar to the MACD indicator, but PPO uses percentage differences, while MACD uses absolute differences.PPO typically includes:
• PPO line – the main line showing the percentage difference between the two EMAs.
• Signal line – a 9-period EMA of the PPO line.
• Histogram – displays the difference between the PPO and the signal line.
• Traders interpret signal line crossovers, zero level crossovers, and histogram movements to identify potential trades and confirm trend direction.
• The PPO also allows comparison of price movements across different assets and is useful for estimating market volatility.
• We show you a backtested PPO trading strategy complete with trading rules and settings.
• More indicators are available if you click here: top trading indicators.

What is the Percentage Price Oscillator (PPO)?

Often written in the shortened form, PPO, the percentage price oscillator is a momentum indicator that shows the percentage difference between two moving averages — a 26-period and 12-period exponential moving average (EMA). It is like the moving average convergence divergence (MACD) indicator, but it uses the percentage difference between the two EMAs rather than the absolute difference used in MACD.

As with the MACD, the PPO usually consists of two lines — the PPO line and the signal line — and sometimes, a histogram. The signal line is a 9-period EMA of the PPO, while the histogram is generated from the difference between the PPO and the signal line.

Traders use the signal line crossovers, zero level crossovers, and the rising and falling histogram to identify trading opportunities and confirm trend direction The indicator is also used to compare the price movement of different assets, as well as estimate volatility in different markets.

Percentage Price Oscillator (PPO) trading strategy – rules, settings, and returns

Let’s backtest a trading strategy that has the following trading rules:

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(Please look at the code below if you are unsure of the trading rules.)

The trading rules are simple, producing the best results for assets that tend to trend. This is the equity curve for gold (GLD) from its inception until today:

Trading performance metrics and statistics from inception until today (including 0.03% commissions per trade):

• Number of trades: 195
• Average gain per trade: 0.76%
• Annual returns: 6.7%
• Win rate: 40%
• Time spent in the market: 50%
• Risk-adjusted return: 13.6%
• Max drawdown: 20%

This is the code we used for the backtest (Amibroker):

THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES CLICK HERE TO SEE ALL 400 ARTICLES WITH BACKTESTS & TRADING RULES

How does the PPO indicator work in trading?

In trading, the PPO indicator works almost like the MACD does. Both use the difference between 12-period and 26-period EMAs, but while the MACD uses the absolute difference, the PPO uses the percentage difference.

Just like the MACD, the PPO gives a buy signal when the PPO line crosses above the signal line — indicating a positive shift in short-term momentum. Similarly, when the indicator line crosses below the signal from above, it means that the short-term momentum has possibly shifted to negative. These short-term shifts in momentum are confirmed when the indicator line crosses the zero level.

Crossing the zero level implies that the 12-period EMA is crossing the 26-period EMA — thus, the indicator rising above the zero level means that the trend is up, as the 12 EMA is now above the 26 EMA, while falling below the zero level means that the 12 EMA is now below the 26 EMA, so the trend is downward.

Divergences between the indicator and price swings are also used to spot potential price reversals. A bullish divergence occurs when the price is making a lower low but the indicator is making a higher low or the other way around and could signal a potential reversal to the upside. Likewise, a bearish divergence, which occurs when the price is making a higher high but the indicator is making a lower high or the other way around could signal a potential reversal to the downside.

Why is the PPO important for traders?

The PPO is important for traders because it measures the percentage difference between two EMAs — short-term and long-term. So, traders can use it to compare the performance or the volatility of different markets or assets since the percentage difference is independent of the absolute prices of the individual assets and, therefore, can be compared.

For instance, let’s say that NVIDIA Corp. (NVDIA), which is priced at $110 as of writing, has a PPO of 12%, and META, priced at $550 has a PPO of 5%. The two can be compared irrespective of their price differences. During the period under review, NVDIA seems to have performed better than META.

Traders also use the PPO to get trading signals and confirm the medium-term trend direction. The indicator crossing above the signal line is seen as a buy signal in an uptrend and crossing below the signal line is a sell signal in a downtrend.

How is the PPO different from the MACD?

The PPO indicator is different from the MACD in that it measures the percentage difference between the two EMAs — 12-period and 26-period EMAs — whereas the MACD measures the absolute difference. However, both use the two EMAs and measure the difference between them.

Given that the PPO measures the percentage difference rather than the absolute difference, it can be used to compare the performance of two assets with different price ranges, as well as gauge the volatility in various markets. The MACD cannot be used for that because it measures absolute difference.

However, both the MACD and the PPO can be used to gauge momentum and medium trends, and even generate trading signals.

What are the key components of the PPO?

The key components of the PPO are as follows:

• The short-period EMA: This is a 12-period EMA, so it moves faster than the longer-period EMA.
• The long-period EMA: This is a 26-period EMA. It moves slower than the short-period EMA.
• The PPO line: This is the percentage of the difference between the 12 and 26-period EMAs.
• The signal line: This is a 9-period EMA of the PPO, so it moves slower than the PPO.
• The histogram: This is sometimes added to the indicator by developers. It is generated from the difference between the PPO line and the signal line.

How do you calculate the PPO?

You calculate the PPO using the following formula:

PPO = 100 x (12-period EMA — 26-period EMA)/26-period EMA.

Here are the steps:

• Compute the 12-period EMA of the price.
• Compute the 26-period EMA of the price.
• Use the PPO formula to calculate the PPO values.
• After the 9^th PPO value, compute a 9-period EMA of the PPO for the signal line.
• You can then subtract the current signal line value from the corresponding PPO value to produce the histogram, which is just a measure of the distance between these two lines.

However, you don’t need to do all these manually, as your trading platform will automatically calculate them and display them once you attach the indicator to the chart.

What does a positive PPO indicate in trading?

In trading, a positive PPO indicates a change in the direction of the trend to the upside, at least, in the short term. This is because a positive PPO is recorded when the short-period EMA crosses above the long-period EMA.

In the chart, this appears as the PPO line crossing and staying above the zero level in the indicator window. Traders usually use that to know the trend situation and trade in the direction of the trend. So, when the PPO is positive and stays in the positive territory, traders look for buying opportunities.

What does a negative PPO suggest in trading?

In trading, a negative PPO indicates a change in the direction of the trend to the downside, at least, in the short term. A negative PPO is recorded when the short-period EMA crosses below and stays below the long-period EMA.

In the chart, this appears as the PPO line falling and staying below the zero level in the indicator window. Traders usually use that to know that the market is trending downward in the short term, so they look for shorting opportunities.

How can you use PPO to identify trends?

You can use the PPO to identify trends by checking where the PPO line is relative to the zero level of the indicator. If the PPO line is above zero, the trend is up, at least in the short term. At the EMA level, it means that the short-term EMA is above the long-term EMA.

On the other hand, when the PPO line is below zero, the trend is downward at the moment. It means that the short-period EMA is below the long-period EMA.

What are PPO crossovers, and why are they important?

PPO crossovers are the moment the PPO line is either crossing the signal line or the zero level. So, they are of two types: the signal line crossover and the zero-level crossover. The signal line crossover occurs when the PPO line crosses above or below the signal line. It indicates a potential change in market momentum.

The zero-level crossover occurs when the PPO line crosses above or below the zero level in the indicator window. It indicates a potential change in the trend, at least in the short term. So, the PPO crossovers are important because they signal a potential change in the market momentum or the trend direction.

How do you interpret PPO histogram signals?

To interpret the PPO histogram signals, you have to know what the histogram represents. The PPO histogram represents the distance between the PPO line and the signal line. The bigger the distance in any direction, the bigger the histogram in that direction, and the stronger the trend.

So, if the market is in a strong uptrend and the PPO line is rising faster and pulling away from the signal line, the histogram will be bigger and above the zero line. In a strong downtrend, the PPO will be falling faster than the signal line, thereby making the histogram bigger below the zero line.

Can PPO help in identifying overbought or oversold conditions?

The PPO may indirectly help in identifying overbought or oversold conditions, but it does not specifically show that. There are no specified levels in the PPO that signify overbought and oversold market conditions.

However, individual traders, on their own, can use the usual levels the indicator normally gets to estimate what the outliers that may be classified as overbought or oversold could be. This way, they create their customized PPO trading system.

How does PPO perform in different market conditions?

The PPO performs differently in different market conditions. It performs best when the market is trending strongly in one direction. It can also perform well if the market is in a sizeable and well-defined range where the signal line crossovers or divergence signals at the support and resistance ends of the range can be used to spot the potential reversals at those zones.

The indicator doesn’t perform well when the market is in a tight consolidation or spiking about.

What are common PPO strategies for entry and exit points?

Common PPO strategies for entry and points include the signal line and zero-line crossovers. Traders like to use the signal line crossover to time their entries when the PPO stays on one side of the zero line, signaling the strength of the trend.

For instance, if the market is in a strong uptrend, both the PPO line and the signal line would stay above the zero level and minor pullbacks would reflect as the PPO temporarily falling below the signal line and crossing back up to signal the resumption of the trend. See the chart below:

How can PPO be combined with other technical indicators?

The PPO can be combined with other technical indicators if you know how it works and the kinds of indicators that can complement it. Depending on what aspect of the PPO indicator you want to exploit, you can combine the PPO with a moving average or ADX for trend or oscillators for swing trading. If you want to use the signal line crossovers for taking entries in a trending market, you may want to combine the indicator with a long-term moving average or the ADX to identify the long-term trend.

If you want to do short-term swing or day trading, you may combine it with the RSI or stochastic to identify the short-term swings and use the zero-line crossover for identifying short-term trends.

What are the limitations of the PPO?

The limitations of the PPO include:

• It does not work in all market conditions, so you need to know when not to use it.
• It cannot be used as a standalone strategy as you may need to combine it with other indicators or price action analysis to find good trading opportunities.
• Even when using it to compare the performance of different assets or volatility in different markets, it cannot give a precise assessment.

How can beginners start using the PPO in their trading?

To start using the PPO in their trading, beginners must first learn how the indicator works so they can choose the different aspects of the indicator they want to incorporate into their trading strategy. A swing trader may want to focus more on the signal line crossovers and the divergence signals, while a position trader may focus on the zero-line crossovers, which simply signify the moving average crossover of the two EMAs.

What timeframes are best for using the PPO?

The best timeframes for using the PPO will depend on the trader’s trading style and strategy. A day trader may focus on intraday timeframes, such as the hourly, 30-minute, or 15-minute timeframes, while a swing trader will have to focus on the daily and 4-hourly timeframes to find suitable setups.

For each style of trading, the best way to know the best timeframe is to backtest your strategy across the relevant timeframes to see the one that offers the best results.

How does PPO help in analyzing stock momentum?

The PPO helps in analyzing stock momentum by showing how fast the market is moving in the short term compared to a later period in the past. This is represented by two EMAs of different periods — short-term and long-term EMAs.

If a stock’s momentum is rising to the upside, the short-term EMA will be rising and speeding away from the longer-period EMA — when the momentum slows, the two EMAs approach each other. In the PPO line, this is shown as the PPO rising further away from zero and coming closer to zero. The same is true for the other side when the momentum is to the downside.

Can PPO be used in cryptocurrency trading?

Yes, the PPO be used in cryptocurrency trading as it can work in almost any market. The indicator is price based and, as such, can work in any market where the price data is readily available for plotting the indicator.

As with other markets, the signal line crossover indicates a change in momentum, while the zero-line crossover indicates a change in trend.

How do PPO signals differ in volatile markets?

PPO signals differ in volatile markets, as they are prone to whipsaws, which give rise to many false signals. In volatile markets, the price spikes more frequently. Such market conditions are not suitable for the PPO because the PPO line will simply crisscross the signal line or the zero line, generating a lot of false signals.

What are the best practices for setting PPO parameters?

The best practices for setting PPO parameters include:

• Considering your trading style and strategy to know how sensitive you want the PPO to be.
• Determining your trading timeframe so you know the parameters that would offer reasonable indicator movements.
• Backtesting different PPO parameters to know the ones that suit your strategy the best.
• Periodically reviewing your results to know when to tweak your system.

How does PPO compare with other momentum indicators?

Compared to other momentum indicators, such as the RSI, stochastic, and William’s %R, the PPO is more than a momentum indicator, as it can be used to identify trend changes, potential reversals, and market volatility, in addition to its momentum signals.

The indicator is similar to the MACD, but it provides a percentage-based assessment of price movements over the periods under review.

What common mistakes do traders make when using the PPO?

The common mistakes traders make when using the PPO include the following:

• Thinking that the indicator works in all market conditions and using it all the time.
• Using the indicator as a standalone signal without combining it with other forms of analysis.
• Thinking that it can give a precise assessment of different market performances
• Trading without proper risk management.

How can PPO be integrated into a trading strategy?

The PPO can be integrated into a trading strategy by using it for a specific aspect of the trading strategy. It can be used to identify the short-term trend direction while another indicator or is used to spot entry and exit setups.

Alternatively, its signal line crossovers can be used to make entries and exits in the right trending markets spotted with other tools.