PPO Indicator: This is why I hate the MACD now
The PPO indicator (Percentage Price Oscillator) primarily measures price momentum.
It can be displayed in the form of a signal line or a histogram, with both versions including a center line.
Like the MACD indicator, the PPO tracks the distance between two moving averages. As market prices trend with increasing momentum, the distance between the two moving averages increase, and the further the PPO indicator moves away from its center line.
The PPO is also similar to the MACD in that they are both indicators assessing the difference between a 26 and 12 exponential moving average.
However, while the MACD indicates the absolute difference between the exponential moving averages, the PPO reports this difference as a percentage of the longer-term EMA. This is a crucial difference that I’ll talk more about later.
The PPO’s calculation formula is as follows:
PPO Indicator On A Price Chart
PPO line: solid blue
Signal line (9EMA of PPO): dotted red line
Visually, the PPO indicator looks identical to the MACD indicator.
However, while the MACD measures the difference between two moving averages, the PPO indicator goes one step further and divides the difference by the longer-term moving average.
In other words, the PPO indicator reports the MACD’s value divided by the longer-term moving average.
PPO Indicator Crossover Signals
The first way to trade with the PPO indicator is to enter a trade upon a center-line crossover.
Pay attention to the blue (PPO) line only. Ignore the red dotted line for now.
Blue arrow indicates a buy, red arrow indicates a sell.
When the PPO line crosses the center-line from below, that’s a signal to go long (buy). Conversely, when the PPO line crosses from above the center-line, that’s a signal to go short (sell).
The second (and more effective) way to trade with the PPO indicator is when it crosses the signal line (the 9EMA of the PPO line).
For this method, you get a buy signal when:
Conversely, you get a sell signal when:
PPO Indicator vs MACD
Now let’s do a visual comparison of the PPO to the MACD.
As you can see, both indicators look identical. This isn’t surprising considering that they have similar calculation formulas.
But since the PPO is displayed in percentage terms, large currency price moves will, in theory, result in a more stable indicator line compared to the MACD.
In practice however, currency prices will rarely fluctuate so dramatically for this to make a meaningful difference. So for the most part, this is just something for you to keep in mind. It’s not something you should worry about.
For most purposes, it’s sufficient to expect both the PPO indicator and MACD indicator to produce the same trade signals.
Comparing Trend Momentum
In practice, the PPO indicator is often used to compare the strength of price trends among currencies, equities and commodities, regardless of their respective prices. This is the PPO’s main advantage over the MACD.
When it comes to comparing currency price trends, the PPO indicator is clearly more effective than the MACD.
For example, the GBPJPY and AUDUSD might both be trending at the same time, but with the former at a price of 172.00 and the latter at 0.7045.
In the chart above, we can see that both markets are trending at approximately the same rate. So the momentum values of both markets should be similar.
Here are the readings of the PPO and MACD on the respective currency pairs:
Do you notice something?
If you were looking at just the MACD indicator, you’d be fooled into thinking that the GBP/JPY is trending more strongly than the AUD/USD.
With the PPO indicator however, you can more objectively compare the strength of both trends since the PPO value is based on the percentage rate of change, and not the absolute change.
In this case, the MACD reports a “stronger” trend on the GBP/JPY only because the price of the currency pair is much higher (at 172.00) than the AUD/USD (at 0.7045).
If you look compare the PPO indicator values however, you can see that both currency pairs are actually trending with similar strength.
In this way, the PPO indicator allows you to make a more objective comparison between the strength of price trends, regardless of the financial assets’ current value.
Besides functioning as an entry signal, the PPO indicator can also be used to generate trend continuation signals.
- Here’s an example:
As shown on this chart, the GBPUSD was making a correction in a bearish trend, forming a support trend line around 1.4795.
At this time, notice that the PPO indicator did not cross above the center line (which would suggest a potential buy), indicating the potential of the continuation of the downtrend with a further price drop.
Convergence With Other Indicators
The PPO indicator can be adapted to most trading styles, including trend trading and short-term scalping.
The following are a few examples.
Trend Trading with PPO Indicator
As a trend trader, you may use the Percentage Price Oscillator to identify the current trend, with the Fibonacci retracement indicator to identify trade entries.
Here, we see the PPO line at a level significantly (and persistently) below the zero center line, indicating an ongoing downtrend. As long as the PPO line remains at these low levels, the probably of the downtrend resuming is high.
The Fibonacci retracement tool can then be used to set a sell limit (entry) order. In this case, a sell order taken at the 50% retracement level would have yielded a nice profit as the downtrend resumed after bouncing off that level.
Now towards the right of the chart, we see that prices began to consolidate while the PPO line begins to approach the center line. This suggests that the downtrend may be ending soon, and that now may be a good time to at least take some profits off the table.
Short-Term Swing Trading With PPO Indicator
As a momentum indicator, the PPO with default settings is typically too slow to provide accurate short-term entry signals.
However, you can lower the settings to make the indicator more sensitive, which is more appropriate for short-term trading.
In the chart below, I’m using the following PPO indicator settings:
- Fast EMA: 3 periods
- Slow EMA: 6 periods
Short-term trading with PPO indicator and Bollinger Bands
In the middle of the chart, notice how prices walked along the lower Bollinger Band for a few hours without bouncing off it.
The PPO indicator is useful here to filter out weak buy trades such as this one.
Now see how the PPO line remained below the red signal line throughout the period when the price was walking along the lower Bollinger Band.
It was only after the PPO line crossed the signal line that a buy trade would have been appropriate.
Then, as prices reached the top Bollinger Band (or when the PPO line crossed the signal line again), you would close the trade for a profit of between 20 - 40 pips.
Double Timeframe Analysis
When used on two timeframes, the PPO indicator can give you a clearer picture of the ongoing market situation.
For example, let’s say you see a buy signal on the 1-hour timeframe, like so:
Blue arrow indicates buy signal from 1-hour chart
But then you look at the 4-hour chart, and see that the PPO line indicates and ongoing downtrend:
In seeing that the PPO line has not crossed the signal line on the higher timeframe (while remaining below the center line), we know the downtrend is not over, and will look to take profits quickly.
This is one of the many ways you can use the PPO indicator on two timeframe charts.
Why I Love The PPO Indicator
Previously, the MACD was one of my favourite indicators. I used it as both a range indicator and a momentum indicator, which describes pretty much all market situations.
But when I learned about the PPO, I knew that it was all the MACD was, and more.
With the PPO, I now have a way to objectively compare the strength of trends between currency pairs, which helps me single out the best trends to be trading. This is something that the MACD is unable to do well.
This being said, I should add that I don’t use the PPO to guide all my trading decisions.
It’s been said a thousand times, but it bears repeating here: no trader should ever enter a trade based on a single indicator alone.
Even though I absolutely love the PPO indicator, I would never take a trade based solely on the signals it generates.
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