Recently, I’ve been organizing some trading notes and want to share a technical indicator I often use—the divergence rate. To be honest, this thing looks a bit complicated at first, but once you understand the principle, it’s quite useful for finding buy and sell points.

First, let’s talk about what exactly the divergence rate is. Simply put, it’s an indicator that measures the distance between the stock price and the moving average line, expressed as a percentage. When the stock price rises too far, the divergence rate tells you it might be overbought; conversely, when it drops too sharply, it also warns you that it might be oversold. I often think of it as the degree of deviation between the stock price and the “average expectation.”

The calculation method is actually simple: (Closing price of the day - N-day moving average) / N-day moving average. The core idea is to see how much the stock price deviates from the average line. I usually use divergence rates for 6-day, 12-day, and 24-day periods, choosing based on whether I want to observe short-term or medium-term trends.

Regarding parameter settings, here are some tips. For short-term trading, I usually look at 5- and 10-day moving averages; for medium-term, 20- and 60-day; and for long-term, only 120- and 240-day. But the key point is that the period chosen for the divergence rate must match your trading style. Stocks with high activity are more sensitive with shorter periods, reacting faster; conversely, longer periods smooth out the fluctuations.

How do I practically use the divergence rate to find buy and sell signals? First, set positive and negative thresholds, like 2% or 3%. When the divergence rate exceeds the positive threshold, it indicates the stock price has deviated too far and may be at risk of falling, so I consider selling; conversely, when it drops below the negative threshold, it indicates oversold conditions and might be a buying opportunity. But here’s a crucial point—don’t rely solely on the divergence rate. I usually combine the divergence rates of the 5-day and 20-day moving averages to get a better picture, capturing both short-term opportunities and not missing the medium-term trend.

Another very important signal is divergence. If the stock price hits a new high but the divergence rate doesn’t reach a new high, that’s often a top signal—be cautious; similarly, if the stock hits a new low but the divergence rate doesn’t reach a new low, that could be a bottoming opportunity.

Honestly, the divergence rate also has its limitations. It’s less effective for stocks that move slowly over the long term with little volatility. Also, because it’s based on moving averages, it has a lagging nature. So, I don’t rely heavily on it for selling; I mainly use it as a reference for buying. Additionally, for large-cap stocks, divergence rate signals tend to be more accurate, while small-cap stocks are more volatile, and relying solely on divergence rate can easily lead to false signals.

My final advice is that the divergence rate should be used in conjunction with other indicators, such as the KD indicator, Bollinger Bands, etc. This provides a more comprehensive market assessment. Parameter selection is also critical—too short a period reacts excessively, while too long a period is sluggish. The most important thing is to adjust flexibly; different stocks and market environments will affect the divergence rate’s performance. For those interested in this kind of technical indicator, I recommend practicing more, adjusting frequently, and finding the method that works best for you.