What Is the Price Percentage Oscillator?
The price percentage oscillator (PPO) is a momentum indicator that displays the percentage link between two moving averages. The moving averages are exponential moving averages of 26 and 12 periods (EMA).
The PPO is utilized to assess asset performance and volatility, identify divergences that could lead to price reversals, provide trade signals, and assist in confirming trend direction.
Comparing Assets to the Price Percentage Oscillator (PPO)
The PPO's percentage value enables traders to compare the performance and volatility of various assets using the indicator. This is especially useful if the prices of the assets vary dramatically.
For example, if a trader compares EFG stock and XYZ stock, he could examine the oscillation range of the signal for each company to determine which is more volatile.
If EFG's PPO range for the past year is between 3.25 and -5.80 and XYZ's PPO range is between 2.65 and -4.5, it is clear that EFG is more volatile, as its range is 9.05 points wider than XYZ's range of 7.15 points. This is a very approximate comparison of the two assets' volatility. The indicator measures and reflects only the distance between two moving averages and not the actual price movement.
Also, the PPO indicator is useful for comparing the momentum of various assets. Traders need to examine the asset with the greater PPO value to determine which has more momentum. For example, if EFG has a PPO of 3 and XYZ has a PPO of 1, EFG has more recent strength since its short-term EMA is higher than its longer-term EMA.
Limitations of the Price Percentage Oscillator (PPO)
In terms of signal line crossovers and centerline crossovers, the PPO is susceptible to generating misleading crossover signals. Imagine the price is first growing, but then leveling out. During the sideways phase, the two EMAs will likely converge, leading in a signal line crossover and maybe a centerline crossing. Yet, the price has neither reversed nor changed direction; it has just halted. Traders utilizing the PPO to produce trading signals must keep this in mind.
There may be two or more crossovers preceding a significant price movement. Numerous losing trades are probable if there is no major price movement following multiple crossings.
Divergences, which may portend a price reversal, are also identified using this indicator. But, divergence is not a timing indicator. It can endure for a lengthy period of time and is not necessarily followed by a price reversal.
The indicator consists of the separation between two EMAs (the PPO) and an EMA of the PPO (signal line). These computations include no intrinsic predictive properties. They depict the past, not necessarily what will occur in the future.
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