Recently, some friends asked me how to use the divergence rate to find buy and sell points, and I realized that many people are still a bit unfamiliar with this indicator. Actually, the divergence rate (BIAS) is a quite practical tool; today, I’ll talk about how to use it for bottom-fishing and topping out.

First, let’s talk about what the divergence rate is. Simply put, it’s a way to express how far the stock price deviates from its moving average in percentage terms. When the stock price is farther from the moving average, it indicates that it may be overbought or oversold, which can lead to rebounds or pullbacks. For example, in a harvest year, a large amount of rice is released onto the market, causing prices to soar, but farmers start selling at lower prices because they worry no one will buy. The stock market works similarly: when prices rise too much, everyone wants to sell; when they fall too much, people start buying the dip.

Calculating the divergence rate isn’t complicated. The formula is: N-day divergence rate = (Closing price on the day – N-day moving average price) / N-day moving average price × 100. The key is to first calculate the moving average price, which is the sum of prices over a period divided by that period. For example, the average price from day 1 to day 5 is the 5-day moving average, and connecting these points forms the MA line.

There are two types of divergence rates. Positive divergence means the stock price is above the moving average, negative divergence means below. The larger the positive divergence, the more short-term profit-taking there is; the larger the negative divergence, the higher the chance of a rebound. Additionally, depending on the cycle, there are 5-day, 10-day, 30-day, 60-day divergence rates, etc.

How to use the divergence rate to find buy and sell points? In a weak market, when the divergence rate exceeds 5, consider selling; when it reaches -5, consider buying. In a strong market, the standards are higher: above 10 for selling, below -10 for buying. I saw an example on Eastmoney: when the 24-day divergence rate exceeds 10, there’s often a quick rebound, so you can hold or slightly reduce your position. Conversely, if it’s below -15, that’s a good opportunity to buy the dip; at this level, you shouldn’t cut your losses.

How to set the divergence rate on a platform? Taking Eastmoney as an example, after selecting a stock, find BIAS in the bottom indicator bar to see real-time changes. You can also click on the system indicator for divergence rate and set parameters to suit your preferences. It’s recommended to set alert signals for continuous tracking of your watchlist.

However, be aware that the divergence rate has limitations. First, if a stock is moving slowly up and down over a long period, the divergence rate’s effectiveness is limited. Second, the divergence rate has a lag, so it can easily miss opportunities; it’s more suitable for identifying buy points rather than sell points. Also, for large-cap stocks, the divergence rate tends to be more accurate; for small-cap stocks, manipulation is easier, and relying solely on divergence rate makes it hard to judge.

A few tips for using the divergence rate: First, don’t look at it alone; combine it with other indicators like KD or Bollinger Bands for more timely and accurate rebound signals. Second, choosing the right parameters is crucial—too short a cycle makes it overly sensitive, too long makes it sluggish, both affecting judgment. Third, adapt to the quality of the stock: good companies rebound quickly when falling because investors fear missing out, while poor companies may rebound late.

Honestly, although the divergence rate is a simple and intuitive indicator, if used well, it can really help grasp buy and sell timing. But investment decisions should consider multiple factors; relying on a single indicator isn’t enough. If you’re interested, try it out on your trading platform and experience the effect of divergence rate in real market conditions.