Percentage Price Oscillator is a simple momentum indicator that is based on a difference between two moving averages. To make the indicator move in an appropriate range, we divide the final number by one of the moving averages used in the calculation.
PPO formula looks like follows:
PPO = (Short EMA – Long EMA) / Long EMA
EMA 9 is usually used as the shorter moving average and EMA 26 as the longer one.
The result of the calculation tells us where the shorter EMA is, compared to the longer EMA. If PPO is e.g. 25 points, it means that shorter EMA is 25 % above the longer EMA. Basicly it is just expression of the speed and amount of price increase/decrease that was done.
We can also calculate the PPO Histogram from the PPO values. We need 2 values for its construction - PPO and its Moving average.
PPO Histogram = PPO – EMA of PPO
Usual values used for PPO and PPO Histogram calculation are 12, 26 and 9 days (alike the MACD settings).
Beware! Sometimes you can find the PPO calculations as follows: [(Short Ema - Long Ema) / Short Ema]. It is basically the same calculation, just the percentage formulation is a bit different. The result is wholy lowered or raised, but such adjustment has no impact on the trades we realize.
How to use the PPO:
Its use is very easy. If the PPO value rises above Zero line, we Buy. Should it fall bellow Zero line, we sell. Beware of ranging market. If the market moves sideways, we get many false trading signals (alike MACD or Moving averages). This oscillator works best on trending markets.
In the end: PPO is very similar to MACD. The main difference is that MACD calculates the difference between Shorter and Longer EMA as a numbers while PPO as a percentage. PPO's main advantage, compared to the MACD, is that it allows us to compare more assets on a basis of percentage differences. Should we use MACD, their comparison would be much more difficult, as one difference could be calculated in cents, other in dollars etc.
If you are interested in a deeper study of this technical indicator and prefer ready to serve solutions, this section may be of interest to you. There you can find all the available indicators in Excel file for download.