What is the PPO?
Used as a technical momentum indicator, the percent price oscillator (PPO) shows the relationship between two moving averages using percentage values. The two moving averages used are a 26-period and 12-period exponential moving averages (EMA).
How it Differs From the MACD Indicator
Almost identical to the moving average convergence divergence (MACD), the percent price oscillator differs only slightly as it measures the difference between two EMA’s and produces a percentage value. An advantage of the PPO over the MACD is that it is comparable between two sets of currencies with different prices, whereas an MACD indicator would not be comparable.
How to Trade Using the PPO Indicator
Main uses of the percent price oscillator include comparison of a currency’s performance and volatility, spot divergence that could indicate price reversals, generating trade signals and confirmation of trend directions.
The PPO generates a buy signal when the indicator line crosses above the signal line from below.
Similarly for a sell signal, it is indicative when the indicator crosses below the signal line from above.
If the PPO indicator is above zero, that confirms an uptrend as the short-term EMA is above the long-term EMA. if the PPO is then below zero, that is confirmation of a downtrend as the short-term EMA is below the long-term EMA.
Another indication of trading signals that traders assess is crossovers of the centerline. A move from below to above the centerline is considered as a bullish signal, while a move from above to below the centerline is considered as bearish. The percentage price indicator crosses the centerline when the 12-period and the 26-period EMA’s cross.
Spotting technical divergence between the indicator and the price is also possible when a currency makes a higher high, but the indicator makes a lower high. This could indicate to a trader that an upward momentum is subsiding. Likewise, if a currency price makes a lower low but the indicator makes a higher low, that would indicate that the price could be heading higher soon.