Recently, some friends have asked about the divergence rate indicator. Indeed, many people are both familiar with and unfamiliar with it. Today, I want to share my understanding of the divergence rate, hoping to help everyone.

In simple terms, the divergence rate is an indicator used to measure how much the stock price deviates from its moving average line, called BIAS in English. A straightforward understanding is the distance between the closing price and the moving average, expressed as a percentage. I initially only truly understood it through examples. Imagine a harvest year where farmers sell rice—when rice production is high and prices hit a record high, farmers become afraid that prices will continue to fall, so they rush to sell at low prices. This psychology is similar in the stock market: when prices rise too much, investors start worrying about a pullback; when prices fall too deeply, they see a rebound opportunity. The divergence rate is used to catch these extreme situations.

The calculation is actually simple. The N-day divergence rate equals (today’s closing price minus the N-day moving average price) divided by the N-day moving average price, then multiplied by 100. First, you need to calculate the moving average, which is the average of prices over a certain period. For example, the average rice price from the 1st to the 5th is the 5-day moving average; from the 2nd to the 6th is the 6-day moving average, and so on, forming the moving average line.

When using the divergence rate to identify buy and sell points, it’s important to distinguish the market environment. In a weak market, a divergence rate above 5 indicates an overbought signal, suggesting a potential sell; a rate below -5 indicates oversold, which could be a low-entry point. In a strong market, the standards are higher—over 10 is considered overbought, and below -10 is oversold. I saw an example on Eastmoney: when the divergence rate exceeded 10 on the 24th, it indicated a significant short-term increase, so holding or slightly reducing positions was appropriate; if it dropped below -15, that was a good opportunity for low-entry.

Parameter settings for the divergence rate are very important. Common periods include 5, 10, 30, 60 days, as well as combinations like 6, 12, 18, 24, 72 days. On platforms like Eastmoney, after selecting a stock, you can find BIAS in the indicator bar below, or click on system indicators to adjust parameters yourself. My suggestion is to choose based on your trading cycle—short-term traders should pick shorter periods, while medium- and long-term investors should choose longer ones.

However, using the divergence rate also has limitations. First, this indicator has a lag, which may cause you to miss the best timing, so I usually only reference it for buy signals and not rely heavily on it for selling. Second, for stocks with long-term slow rises and falls, or low volatility, the divergence rate’s effectiveness is limited. Also, for large-cap stocks, divergence rate signals tend to be more accurate; for small-cap stocks, which can be manipulated easily, relying solely on this indicator is difficult.

In practical trading, I’ve learned that the most important thing is not to look at the divergence rate alone. It’s best to combine it with stochastic indicator KD or Bollinger Bands BOLL for more accurate judgments. For example, combining divergence rate with KD can make rebound entries more timely; combining with Bollinger Bands is better suited for oversold rebounds. Parameter selection is also crucial—too short a period can lead to overtrading, while too long may cause missed opportunities. Lastly, adjust flexibly based on the stock’s quality—good companies rebound quickly after falling, while poor companies may take a long time to rebound.

Overall, the divergence rate is a useful auxiliary tool, but not万能. Using it in conjunction with other indicators and understanding the market will help you make better use of it.