Percentage Price Oscillator

The Percentage Price Oscillator is built around the same foundation as the Moving Average Convergence Divergence, which is also an oscillator for technical analysis.

The Percentage Price Oscillator is even used with the same default settings. If you were to use the PPO as it were intended, you’d use 12, 26, and 9-period settings.

Percentage Price Oscillator Formula

The Percentage Price Oscillator formula is easy to understand, so traders should invest a few moments to understand how the PPO is calculated. The formula below is the calculation for the PPO indicator:

PPO = (12-period EMA – 26-period EMA)/26 period EMA

Once completed, this calculation is plotted in the oscillation area on your forex chart. Next, the 9-period “signal line” is added to the plot so that you can see the readings smoothed over 9 periods.

PPO Interpretation

Traders who want to use the Percentage Price Oscillator can use it as they would any other oscillator. Here are some methods traders employ:

1. Crossover trading – Crossover trading with this oscillator means trading a currency pair based on the crosses that result between the original plot and the smoothed signal line. Just like a moving average crossover, you’ll want to alternate your buys and sells with each cross of the signal line.
2. Divergence trading – The percentage price oscillator can be used for divergence trading. When the general trend in the PPO diverges from the general trend in the currency pair quoted price, the market should soon respond with a movement in the general direction of the PPO. Thus, if the PPO points up and the currency pair price is falling, the next move should be bullish. If, however, the PPO points down and the currency pair price is rising, the next move should be bearish.

Why use the Percentage Price Oscillator?

There are natural advantages that come along with the percentage price oscillator. First, know that the PPO calculates its values based on an absolute percentage change. Thus, the reading in one period is the same as another, or to another currency pair. Percentage data is ratio data, which makes for easy comparisons to other data.

Secondly, traders can better see the relationship between a raw series plot in the PPO and the 9-period moving average in graphical form. The MACD, especially on Metatrader 4, makes comparing the two lines difficult due to its design. The PPO is far “cleaner” and easier to read, especially if you want only the moving averages and not the middle zero line found in the MACD.