Recently, I’ve found that many people are asking how to use the divergence rate. In fact, this indicator is definitely worth studying in depth. Simply put, the divergence rate is a tool for measuring how far the price is from the moving average line. The core logic is very straightforward: the price will eventually return to the average cost.

First, let’s talk about the most basic part. The moving average line represents the average price over a past period. When the price moves too far away from the moving average, the market often enters an extreme state. The calculation of the divergence rate is actually not complicated: (closing price of the day − N-day moving average) ÷ N-day moving average × 100%. A positive value indicates a premium, a negative value indicates a discount, and the number itself is the percentage difference.

Here’s a key point: does divergence always exist? The answer is yes. Because moving averages lag, when the market changes, the moving average can’t keep pace with the price. So the gap will inevitably exist—only to different degrees.

When it comes to what divergence rate is considered “large,” there is no absolute answer; it depends on the market’s characteristics. I’ve compiled some commonly seen extremes for several benchmark assets: the S&P 500 is roughly 3-5%, Bitcoin is about 8-10%, and gold is in the range of 2-5%. But these are just references—each asset is different. For example, 0050 and the S&P 500 may differ, and Bitcoin versus Ethereum may show a clearly noticeable gap. Therefore, before using this indicator, you should backtest it specifically on the assets you trade.

A positive divergence indicates a strong market. A moderate positive divergence suggests that the bulls have the advantage, but an extreme positive divergence means you should be wary of overbought risk. Negative divergence is the opposite: a moderate negative divergence indicates weakness, while an extreme negative divergence could be an opportunity for oversold conditions. The key to judging how large the divergence rate is lies in observing historical price action and marking out the range of extreme values.

Divergence signals are also important. Top divergence occurs when the price makes a new high, but the divergence rate doesn’t follow—this implies that momentum is weakening. Bottom divergence occurs when the price makes a new low, but the divergence rate fails to make a new low as well; it usually signals a rebound. These can all help confirm extreme values.

In real trading, my recommended approach is not to enter positions by looking at the divergence rate alone. Use it as a warning signal, and combine it with candlestick patterns or other indicators such as RSI. For instance, when the RSI enters oversold territory and the divergence rate is at an extreme negative value, check whether there are signs of a bottom before considering a setup.

For parameter settings, use 5-day and 10-day for short-term trading, 20-day for swing trading, and 60-day for long-term investing. Choose according to your trading style.

There’s a common misconception you should avoid: in a strong uptrend, the divergence rate can become muted, and the price may stay far away from the moving average for a long time. In that case, don’t blindly buy the dip—wait for multiple signals to confirm. Also, when the divergence rate is very large, the price doesn’t necessarily revert immediately. Sometimes it consolidates sideways first before starting a new trend.

After all, what the divergence rate reveals is a market pattern: short-term sentiment can drive sharp surges and crashes, but in the long run, prices will eventually return to the mean. However, the indicator is only a supporting tool—the trend is the main focus. Even in a strong one-directional trend, prices can deviate significantly before finally returning to normal. By using the divergence rate well, together with other tools and risk management, you can effectively improve your trading win rate.