Learn how to use the Percentage Price Oscillator (PPO) to compare stocks, as it can show both trend direction and increasing price momentum.
PPO Versus MACD
The Percentage Price Oscillator (PPO) is not a highly utilized indicator, but most traders have heard of or used the MACD (moving average convergence divergence). The two indicators are nearly identical, except that the PPO is scaled using percentages, while MACD is based on price.
That means that PPO readings are comparable across all stocks, while the MACD readings are not.
Consider a stock that is trading near $70. Its price movements are going to be smaller than a stock that trades near $300. The $70 stock may have a peak (daily chart) MACD readings of $2, while the $300 stock has peak readings near $9. Not easily comparable.
Recall, that the MACD, and the PPO, are measuring the distance between a 12-period and 26-period moving average. As the price of a stock accelerates up or down, the moving averages move apart, since the shorter one moves faster than the longer one. MACD measures this distance in dollars. PPO measures the difference in percentage.
Since percentages are comparable, no matter what the stock price is, PPO is a useful tool for comparing momentum between stocks.
Using PPO To Compare Stocks
If one stock has a PPO reading of 1 and another has a reading of 2, that means the one with the reading of 2 has had more recent upside momentum, since the moving averages within the PPO calculation have moved a further distance apart.
This doesn’t necessarily mean we jump into the higher momentum stock. We still need a valid trade setup and we will want to check the chart to make sure that it is in an uptrend if that is what we are looking for.
That said, the PPO is a quick way to filter through stocks. A PPO reading above 0 means that the shorter-term moving average is above the longer-term moving average. Therefore, a reading above 0 is a very crude filter for finding stocks in recent uptrends. Recent is the key word. The stock could actually be declining in price for the last year, but could temporarily pop above o on a bear market rally.
The charts below show two banking stocks. Both charts look fairly similar, yet the PPO can quickly identify a few differences.
Bank of America (BAC) on the right had a much stronger rally coming off the 2016 lows. Its PPO went above 11, while JPMorgan Chase (JPM) stayed below 8. At the time of the screenshot, the JPM PPO is below 0, while the BAC PPO is above 0. Within seconds, without measuring anything, it is clear to see that BAC has been the stronger stock overall.
Things may change in the future, but in the past and currently, the PPO shows which stock is the better performer and which stock has had the bigger upside moves.
A similar process can be undertaken when comparing any two or more stocks.
Note: the yellow line on the PPO indicator is the signal line (9). It is simply a 9-period moving average of the PPO line, which some traders use to generate trade signals, similar to the MACD.
Final Word On the Percentage Price Oscillator (PPO)
Using the PPO is not mandatory. It is an additional tool you can use if you find it helps filter your trades and gives you more clarity. While the PPO can help clarify some questions, it won’t always provide the right answer. A rapid price rise will cause a spike in the PPO, yet one spike in price or the PPO doesn’t necessarily mean the stock is worth trading. We still want to look at the overall picture of how a stock is doing before we trade it.
Don’t rely too heavily on the indicator. Studying the actual price will reveal much more about the trend than the indicator. Even if the PPO looks really good compared to another stock, always wait for a valid entry, plan your exit before taking the trade, and control your position size.
By Cory Mitchell, CMT