Introduction
The Percentage Price Oscillator (PPO) is a popular technical analysis tool that calculates the variance between two moving averages of a financial asset’s price. This indicator is particularly useful for detecting potential trends and momentum shifts in the asset’s price. It was developed by Gerald Appel, a respected technical analyst and creator of several technical indicators. The PPO was first introduced in Appel’s book, “Technical Analysis: Power Tools for Active Investors” in 2005.
The PPO is a momentum oscillator that quantifies the difference between two exponential moving averages of an asset’s price, expressed as a percentage of the larger moving average. Traders commonly use the PPO to identify potential buy or sell signals, as well as to determine trend direction and momentum. To calculate the PPO, traders first choose two different time periods for the moving averages, although 12 and 26 are commonly used. However, the values can be adjusted to fit the trader’s preference and the asset being analyzed.
Once the two moving averages have been selected, the Percentage Price Oscillator is calculated by subtracting the longer moving average from the shorter moving average and dividing the result by the longer moving average. The outcome is then multiplied by 100 to express it as a percentage.
Traders use the PPO to identify bullish or bearish trends in the asset’s price. A value above zero suggests a bullish trend, while a value below zero indicates a bearish trend. Additionally, traders can look for divergences between the PPO and the price of the asset, which may signal a potential trend reversal.
In conclusion, the Percentage Price Oscillator is a valuable tool for traders seeking to detect potential trends and momentum shifts in an asset’s price. By using the PPO, traders can make informed decisions about when to enter or exit positions.
Computing the Percentage Price Oscillator
The PPO is a type of momentum indicator used in technical analysis to gauge the percentage difference between two exponential moving averages of a financial asset’s price, with the comparison made against the larger of the two moving averages. The formula to calculate the PPO is as follows:
PPO = ((12-day EMA - 26-day EMA) / 26-day EMA) x 100
Where:
- EMA refers to Exponential Moving Average
- The 12-day EMA is the shorter-term EMA
- The 26-day EMA is the longer-term EMA
The resulting difference between the two EMAs is expressed as a percentage of the longer-term EMA
After calculating the PPO, traders typically plot it as a histogram or line chart, and look for crossovers of the PPO line with its signal line (usually a 9-day EMA of the PPO) to identify potential buy or sell signals.
Understanding the Percentage Price Oscillator in technical analysis
The Percentage Price Oscillator is a crucial tool in technical analysis as it enables traders to identify potential trends and momentum shifts in an asset’s price. It achieves this by comparing two moving averages of the price, thereby revealing trends that may not be obvious from the price chart alone.
There are several ways to interpret the Percentage Price Oscillator. Firstly, bullish and bearish divergences can signal an imminent trend reversal. A bullish divergence occurs when the value of an asset experiences a decline, but at the same time, the Percentage Price Oscillator is making higher lows, indicating a shift in momentum to the upside. Conversely, a bearish divergence occurs when the value of an asset is making higher highs, but at the same time, the Percentage Price Oscillator is making lower highs, indicating a shift in momentum to the downside.
Secondly, crossovers can indicate the start of a bullish or bearish trend. When the Percentage Price Oscillator crosses above zero, it signals the start of a bullish trend, whereas a crossover below zero signals the start of a bearish trend. Traders can use these crossovers as entry or exit signals for their trades.
The identification of overbought and oversold conditions is one of the benefits of using the Percentage Price Oscillator. When the oscillator reaches high values above the zero line, it indicates that the asset is overbought and may be due for a pullback. Conversely, when the oscillator reaches low values below the zero line, it indicates that the asset is oversold and may be due for a bounce.
Overall, the Percentage Price Oscillator is a versatile indicator that provides valuable insights into an asset’s price trends and momentum. Traders can use it in combination with other indicators and technical analysis tools to develop a comprehensive trading strategy.
Gerald Appel‘s suggestions on how to use the Percentage Price Oscillator
The Basic Scanner and Advanced Scanner offer an extensive collection of scan functions . . . Write Price Oscillator scans for stock selection.
Gerald Appel, the originator of the Percentage Price Oscillator, suggested that traders can employ this indicator in various ways to help them identify potential trends and momentum shifts in the price of an asset.
Here are some of his recommendations for using the Percentage Price Oscillator effectively in trading:
Use the Percentage Price Oscillator as a confirmation tool
Lane recommended that traders use the Percentage Price Oscillator as a confirmation tool instead of relying solely on it for generating signals. Traders can combine the Percentage Price Oscillator with other technical indicators and price action analysis to get a more comprehensive understanding of the market and make more informed trading decisions.
Identify overbought and oversold conditions
The Percentage Price Oscillator can help traders determine overbought and oversold conditions in the market. When the oscillator exceeds high values above the zero line, it could mean that the asset is overbought and ready for a pullback. Conversely, when the oscillator reaches low values below the zero line, it could suggest that the asset is oversold and ready for a bounce. Traders can use these signals to enter or exit positions.
Adjust the settings to fit the asset being analyzed
Lane believed that traders should adjust the settings of the Percentage Price Oscillator to fit the asset being analyzed. Different assets may have different price patterns and trends, so traders should experiment with different time periods for the moving averages to see what works best for each asset.
Watch for divergences
Lane considered looking for divergences between the indicator and the price of the asset to be one of the most powerful ways to use the Percentage Price Oscillator. When the Percentage Price Oscillator is making higher highs or lower lows than the price of the asset, it could indicate that momentum is starting to shift and a trend reversal may be imminent.
Combine with price action analysis
Traders should also consider using price action analysis in conjunction with the Percentage Price Oscillator. By looking at the price chart and identifying key levels of support and resistance, traders can confirm signals generated by the oscillator and get a better sense of the overall direction of the market.
Use multiple time frames
Lane recommended that traders use the Percentage Price Oscillator on multiple time frames to gain a better understanding of the market. By using the oscillator on both shorter and longer time frames, traders can get a more comprehensive picture of the trend and momentum of the asset.
Combine the Percentage Price Oscillator with other indicators
While the Percentage Price Oscillator is a useful tool for identifying potential trends and momentum shifts, Lane believed that traders should use it in combination with other technical indicators to help confirm signals and avoid false alarms. For example, traders might combine the Percentage Price Oscillator with the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) to get a more complete picture of the market.
Pay attention to the slope of the moving averages
Finally, Lane stressed the importance of paying attention to the slope of the moving averages used in the Percentage Price Oscillator. When the moving averages are sloping up, it could indicate a bullish trend, while a downward slope could indicate a bearish trend. By keeping an eye on the slope of the moving averages, traders can get a better sense of the overall direction of the market and make more informed trading decisions.
Practice risk management
Traders should always practice risk management when using the Percentage Price Oscillator or any other trading strategy. This includes setting stop-loss orders and limiting the amount of capital risked on each trade. By practicing good risk management, traders can minimize potential losses and maximize their chances of success.
Also see: Stop Loss . . . and its importance in trading – Some ways of setting up stop loss levels
In conclusion, Lane believed that the Percentage Price Oscillator was a valuable tool for traders but stressed the importance of using it in combination with other indicators and analysis techniques to get the most accurate signals.
Advantages & Limitations of the Percentage Price Oscillator
Here are some advantages and limitations of using the Percentage Price Oscillator in trading:
Advantages
- Trend identification: By analyzing trends and momentum shifts in the market, the Percentage Price Oscillator can help traders make informed decisions.
- Overbought/oversold conditions: Traders can use the Percentage Price Oscillator to identify overbought and oversold conditions and take advantage of the opportunities to enter or exit positions.
- Divergences: The Percentage Price Oscillator can help identify potential trend reversals by looking for divergences between the indicator and the price of the asset.
Limitations
- Lagging indicator: Since the Percentage Price Oscillator relies on past price data, it may not always accurately predict future price movements.
- False signals: While the Percentage Price Oscillator can provide valuable insights, it can also generate false signals. Traders must confirm these signals using other indicators or price action analysis before taking action.
- Market volatility: The Percentage Price Oscillator can be less effective in highly volatile markets due to the likelihood of false signals or whipsaws. Traders should exercise caution and consider using additional indicators to confirm signals in such conditions.
The Percentage Price Oscillator is an effective tool in technical analysis that can assist traders in recognizing trends and shifts in market momentum. However, it’s crucial to use the oscillator along with other indicators and price action analysis to make informed trading decisions and maximize the possibility of success.
It’s crucial to keep in mind that the Percentage Price Oscillator has limitations, as it’s a lagging indicator and can produce false signals in specific market situations. To mitigate risks, traders should exercise prudent risk management practices and combine the Percentage Price Oscillator with other indicators and analysis to validate signals.
