Recently, while reviewing technical indicators, I found that many people's understanding of the divergence rate is actually still superficial. Today, I want to talk about this underrated indicator.

Simply put, the bias indicator is a tool used to see how far the price is from the moving average. When your average purchase price is significantly higher than the average cost over a past period, the market usually gives you a signal: be cautious, the price may revert to the mean. That’s why many traders use the divergence rate to judge overbought and oversold conditions.

The calculation method is actually simple: (Today’s closing price − N-day moving average) ÷ N-day moving average × 100%. A positive result indicates a premium, a negative result indicates a discount. For example, if the divergence rate is 3, it means the current price is 3% above the moving average. But here’s a key understanding: prices almost never move exactly along the moving average because the moving average itself has a lag, so divergence always exists; the difference is whether the value is reasonable.

So, what counts as extreme? There’s no standard answer; it depends on the market. For example, in the S&P 500, 3 to 5% is usually considered quite extreme, but for Bitcoin, it might be 8 to 10%, and for gold, 2 to 5%. Therefore, before using the bias indicator, you must backtest the asset you’re trading to find its own extreme values.

In my practical experience, I often combine extreme divergence with candlestick reversals. When the divergence rate has already deviated significantly from the extreme, although you can't precisely predict which candlestick will reverse, historically these areas are usually lows, so you can enter in stages to average down the cost. Another useful signal is the bullish hidden divergence: when the price makes a new low but the divergence rate doesn’t make a new low at the same time, it often indicates selling pressure is waning, which can be a good entry point.

But remember one thing: the divergence rate is just an auxiliary tool. Don’t rely on it solely to decide buy or sell. In a strong trend, prices can stay at extreme divergence levels for a long time. If you trade against the trend, you’ll only get market lessons. The best approach is to combine it with other indicators, such as RSI entering oversold territory, and when divergence is at an extreme negative value, then consider positioning.

Short-term traders usually use the 5-day or 10-day moving average, swing traders use the 20-day, and long-term investors look at the 60-day. The key is to find parameters that match your trading cycle. Also, remember that indicators are just references; the trend is the main focus. Sometimes, prices may oscillate sideways at extreme divergence levels—that’s not indicator failure, but the market building momentum for the next move.

In summary: the core logic of the bias indicator is that prices will eventually revert to the mean, but this process may take time, and in strong trends, it may temporarily fail. So, using it to alert yourself whether “the current position is reasonable” is much more practical than relying on it to precisely catch bottoms or tops.