Recently, while studying technical indicators, I found that many people misunderstand the bias indicator (disparity indicator). In fact, it is a tool used to observe how far the price is from the moving average. Today, I want to discuss how to effectively use this indicator.

Simply put, the price cannot always stay close to the moving average. When the market fluctuates, the moving average reacts more slowly, which creates a divergence. The core logic of the bias indicator is straightforward: when the price deviates too much from the moving average, it will eventually return. Therefore, when the divergence rate reaches extreme values, it is a sign that the market may be overreacting.

The calculation method is not complicated: (closing price of the day − N-day moving average) ÷ N-day moving average × 100%. A positive result indicates a premium (positive divergence), while a negative result indicates a discount (negative divergence). For example, a divergence rate of 3 means the price is 3% above the moving average.

How to determine if the divergence rate is too extreme? There is no absolute answer; it depends on the market characteristics. For the S&P 500, 3-5% is considered extreme, while for Bitcoin, it might need to reach 8-10%. Therefore, you must backtest your target asset to find a reasonable range for extreme values.

When I use the bias indicator, I often combine it with candlestick reversals. When the divergence is already large and a candlestick shows a lower shadow, I gradually enter positions to average down. Additionally, divergence signals are very useful: a bearish divergence occurs when the price hits a new high but the divergence rate does not, and a bullish divergence occurs when the price hits a new low but the indicator does not. These are potential turning points.

However, remember that the bias indicator is just an auxiliary tool; do not rely on it alone for entries. In strong trending markets, prices can stay far from the moving average for a long time, causing the indicator to become less responsive. My suggestion is to use it together with RSI or price action. When multiple signals align, the win rate tends to be higher.

If you are a short-term trader, use the 5-day or 10-day moving average with the bias indicator; swing traders can use the 20-day; long-term investors should consider the 60-day. Adjust the parameters according to your trading cycle so that the indicator can be truly effective.

Finally, the divergence rate reflects a fundamental market truth: prices may surge or plunge due to emotions in the short term, but ultimately, they tend to revert to the mean. However, in strong unidirectional trends, prices can still experience significant deviations, so don’t take the bias indicator too literally—trend is the main factor. If you're interested, you can try testing some assets on Gate and backtest the results.