Recently, someone asked me how to interpret the bias indicator, and I realized that many people still have some confusion about this tool. Actually, this indicator looks complicated, but the core logic is very simple—it’s just measuring how much the stock price deviates from its average level.

Let's start from the most basic. There’s always some distance between the stock price and the moving average line, and this distance is what we call the divergence rate. When the stock price rises very quickly, it will move away from the moving average; when it falls sharply, it also deviates. At this point, market participants’ psychology begins to play a role—some will think “it’s risen too much, it should fall,” while others will think “it’s fallen too much, it should rebound.”

I like to use an agricultural analogy to explain. Imagine a harvest year when rice prices soar to a record high, and farmers rush to sell, fearing that if they don’t sell now, no one will buy later. The stock market is similar—when stocks reach extreme levels, investors start expecting a decline and sell in advance; conversely, when prices hit extreme lows, everyone begins to buy eagerly.

The calculation method for the bias indicator is very straightforward: (closing price of the day – N-day moving average price) / N-day moving average price. But there’s a point to note—since the moving average itself has lag, the divergence rate calculated based on it also won’t react instantly.

When setting parameters, use 5, 6, or 10-day moving averages for short-term, 20 or 60-day for mid-term, and 120 or 240-day for long-term. As for whether to use 6, 12, or 24 days for divergence rate, it depends on your trading style. Stocks with high activity levels will be more sensitive with shorter cycles, reacting faster; longer cycles will be more stable and less noisy.

In practical trading, how to use the bias indicator to find buy and sell points? First, set a positive threshold and a negative threshold. For example, a 5-day divergence rate can be set around 2% to 3%, but this needs adjustment based on specific stocks and market conditions. When the divergence exceeds the positive threshold, it indicates overbought conditions and potential downward pressure, so consider selling; conversely, when it falls below the negative threshold, it shows oversold conditions and a possible rebound, making it suitable to buy.

My experience is that combining multiple moving averages yields better results. For example, observing both the 5-day and 20-day divergence rates can give a more comprehensive view of short-term and mid-term trends. Another technique is to look for divergence—if the stock price hits a new high but the divergence rate doesn’t, it’s often a top signal; if the stock hits a new low but the divergence rate doesn’t, it’s usually a bottom signal.

But it’s also important to recognize the limitations of this indicator. If a stock is moving within a narrow range for a long time, the divergence rate won’t be very effective. Also, because it has lag, it’s not recommended to rely solely on it for selling signals, but it can be used as a reference when buying. Additionally, for large-cap stocks, divergence rate signals tend to be more accurate because their volatility is more regular; for small-cap stocks, with more variables, relying solely on divergence rate is difficult.

In actual trading, the most important thing when using the bias indicator is not to use it alone. Combining it with tools like the KD indicator or Bollinger Bands will be much more effective. The combination of KD and divergence rate is especially suitable for rebound markets, while Bollinger Bands combined with divergence rate are better for buying during oversold rebounds. Parameter selection is also critical—too short a period reacts excessively, too long a period reacts slowly. Adjust according to your trading cycle.

Finally, I want to say that stocks with good performance and low risk tend to rebound quickly when they fall because everyone fears missing out and will buy rapidly; stocks with poor or unstable performance may take a long time to rebound. So, the same divergence signal can have very different effects on different stocks. Overall, the divergence rate is a simple and intuitive tool, but to use it well, you still need to adapt flexibly to market conditions rather than operate mechanically according to rules.