One of the popular trend following indicators is PPO or Percentage Price Oscillator. It works best in trending markets. Here’s a quick overview of this indicator.
What is PPO?
PPO is a momentum oscillator. PPO shows the relationship between two moving averages. It is basically the difference between two moving averages as a percentage of the larger moving average. The moving averages lengths are defined by the user.
To calculate Percentage Price Oscillator, the long-term exponential moving average (EMA) is subtracted from the short-term EMA, and then this difference is divided by the long-term EMA. This is then expressed in percentage. For example, in the case you are using 10-day and 21-day EMAs,
PPO = [(10-day EMA – 21-day EMA)/21-day EMA] x 100
The figure below shows a Percentage Price Oscillator.
PPO and Trend
The Price Oscillator technical indicator can be used to confirm bullish as well as bearish price moves.
- Bullish Cross: Whenever the short-term moving average crosses above the long-term moving average, it is said to be a bullish crossover. This is considered as a good buy level.
- Bearish Cross: Whenever the short-term moving average crosses below the long-term moving average, it is said to be a bearish crossover. This is considered as a good sell level.
The Price Oscillator can also be used to detect when a trend is slowing down or accelerating and also whether it is getting ready for a potential reversal.
- When the Price Oscillator moves down towards the zero line, the trend is said to be slowing down.
- When the Price Oscillator is moving up from the zero line, the price trend is said to be accelerating.
PPO and Momentum
The Price Oscillator technical indicator can be used to identify overbought and oversold conditions.
- Oversold: In oversold areas, the Price Oscillator typically bottoms. This is generally a good area for buying.
- Overbought: In overbought areas, the Price Oscillator typically tops. This is generally a good area for selling.
PPO and Divergence
The occurrence of a divergence between the Percentage Price Oscillator and price action can indicate a change in trend.
- Bullish Divergence occurs when price forms a lower low, but the PPO forms a higher low.
- Bearish Divergence occurs when price forms a higher high while the PPO forms a lower high.
- A hidden bullish divergence occurs when the market forms higher lows, while the PPO forms lower lows.
- A hidden bearish divergence occurs when the market forms lower highs, while the PPO forms higher highs
How Traders Use PPO
Following are the bearish and bullish signals that are used by traders for making better trades.
- When the PPO Line crosses above the Zero Line and basically move from negative to positive.
- When bullish divergence or hidden bullish divergence happens
- When the Percentage Price Oscillator is in oversold area
- When the PPO Line crosses below the Zero Line and basically move from positive to negative.
- When bearish divergence or hidden bearish divergence happens
- When the Percentage Price Oscillator is in the overbought area
The figure below shows how to use Percentage Price Oscillator for making long and short trades
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