Price oscillators could also be regarded as “MACD’s in percentage terms”.
A price oscillator signals a pre-defined move along with the Moving Average convergence
– divergence. That means both these indicators identify the upcoming move
at similar times. But, why is a price oscillator preferred over MACD? As discussed,
it is because of the ease in determining a signal, and its additional features like
determination of volatility, etc. A price oscillator works the best, in a trending
market. It has the potential to find bullish or bearish signals. But, it is difficult
to find its path in a sideways market. Traders will just be hitting their stop losses,
if they trade according to these strategies in a choppy market.
It is not necessary that traders should consider the standard Exponential moving
averages, 12 EMA and 26 EMA. A price oscillator works by considering any two exponential
moving averages [EMA] according to the trader’s preferences.
Based on the signal line crossover [9 day EMA], long or short positions could be
initiated. Price oscillator is positive, if the shorter moving average is more in
value, than the longer moving average. This indicates a bullish phase. Similarly,
if the oscillator is negative, a downtrend is most likely to happen. When the PPO
moves in to the positive territory, a buy signal is generated. That is also the
point where the 12-day EMA will be moving above the 26-day EMA and hence, a short
term up trend is most likely to happen in the coming days.
The range for a MACD is high if the price of the underlying is high. So, it becomes
difficult to measure and identify the crossovers, but that’s not the case
in price oscillators. No matter how big the share price is, PPO will range between
a small and noticeable value. This is one big advantage of a price oscillator over
MACD. So, no matter whichever stock or index chosen, a trader will be able to easily
identify buy or sell signals.
Price oscillator is also used to measure the volatility in a stock. “The price
oscillator’s range for a given stock is higher than the other”, means
that the former one is more volatile than the latter one. Traders use this method
to identify a high beta stock in a particular sector. So, if a price oscillator
for a specific stock is ranging between a higher value than the others in the same
sector, then the risks and rewards associated with that specific stock are bigger.
If a stock has comparatively bigger difference between the 2 EMAs considered, it
implies that the particular stock is volatile and is facing large swings. Mathematically,
if the difference between the two considered EMAs, [in this case 12 and 26 EMA]
is big, then, it clearly shows that the price oscillator percentage will be a bit
on the upside.
Advantages of Price Oscillator
- Price oscillator is measured as a percentage. That makes it more simple and convenient
to identify crossovers.
- It ranges between a small value and that makes it more
efficient than MACD.
- The uptrends and downtrends in a price oscillator can be
used to measure the momentum in the particular stock or an index.
- As with many
indicators, price oscillator is used to identify a trend before the underlying stock
or an index starts behaving.
- Despite huge price changes in the corresponding
stock or underlying, price oscillator can be used to generate signals.
oscillator tends to generate huge returns under trending markets.
Disadvantages of Price Oscillator
- Price oscillator always doesn’t identify trends, based on crossovers, as is
the case with many indicators.
- It cannot be able to show overbought and oversold
- A price oscillator doesn’t work under sideways or choppy market.
The main use of a price oscillator is to identify trends before the actual trend
starts performing. It is measured on a percentage basis and that is a big advantage
compared to MACD. Using price oscillator along with other indicators like RSI, Stochastic
oscillator, etc. will make trade more profitable. The main drawback of a price oscillator
is its inability to identify overbought and oversold levels. Price oscillators are
generally used in trending markets. No matter, how far the stock goes, a price oscillator
will be able to depict its movement.