You know MACD. Meet its cousin: PPO or PercentagePriceOscillator. Simply put: PPO is the value of MACD divided by the longer moving average. This result is then multiplied by 100 to express the value in a percentage. Compared to MACD, PPO is more suitable for long term analysis.
Just like MACD, PPO can have a histogram too. Trading PPO in the conventional way by the crossings of the PPO-line and the Signal line, may result in chasing trades, because PPO, just like MACD, suffers more or less lag. The amount of lag differs greatly depending on the settings used, but while fast settings reduce lag considerably, they also come with the risk of whipsawing.
Why not use the histogram differently and reduce lag considerably? Why not make it dynamical to express the ROC of the PPO-line? Instead of showing the difference between the PPO-line and its Signal line, let the histogram show the daily Rate of Change of the PPO-line itself. The result is a PPO with a built-in Early Warning System combined with a nice divergence feature!
In acknowledgment to the Wall Street saying : "market tops are a process, bottoms are an event", it's perhaps best to ride uptrends until PPO turns down, signaled by a colorshift from green to red in the histogram, thus negating shifts from green to dark green. As downtrends often move faster, the deceleration warning from the histogram (colorshift from red to dark red) could be an exit signal. In case of a confirmed divergence a more aggressive play could be: exit short and enter long.
NB! As always: do your own diligence and have fun ROC'n rolling with PPO!
Bonus:
The thinkScript code is enclosed in the comment section.
Copy/Paste as New study in TOS or drop me a line and I'll send the .ts study for direct import in return.
Be sure to select ROC as HistoType/ColorType and adjust settings to what suits you.
Feedback on indicator settings is most welcome!
