Recently, while studying technical indicators, I found that many traders actually don't fully understand the true purpose of the BIAS indicator (deviation rate), and instead use it as a buy/sell signal, which can easily lead to pitfalls.

Let me briefly explain what the deviation rate is. Essentially, it measures the distance between the current price and the moving average line, expressed as a percentage. The formula is simple: (Closing price of the day − N-day moving average) ÷ N-day moving average × 100%. A positive result indicates a premium, while a negative result indicates a discount. For example, a deviation rate of 3% means the price is 3% above the moving average.

Why does deviation occur? Because moving averages are lagging indicators. When the market price changes rapidly, the moving average responds more slowly, so the price can almost never stay exactly on the moving average. This deviation itself isn't a problem; the key is whether the degree of deviation is reasonable.

When I look at the BIAS indicator, I usually consider two dimensions. First is the positive or negative direction—when the deviation rate is above 0, the market is in a strong state, and moderate positive deviation indicates bullish dominance; but if it reaches an extreme positive deviation, watch out for overbought conditions. Conversely, negative deviation indicates market weakness, and extreme negative deviation could be a sign of oversold conditions.

However, there's an easily overlooked point: there is no standard for what constitutes an extreme value; it must be judged based on market characteristics. For example, the extreme deviation rate for the S&P 500 is usually around 3-5%, while for highly volatile assets like Bitcoin, it might be 8-10%, and for gold, 2-5%. Therefore, before using it, you must backtest your target asset to find its own extreme value range.

I recommend combining divergence signals. Top divergence occurs when the price hits a new high but the deviation rate doesn't confirm a new high, indicating weakening momentum and a potential reversal; bottom divergence is when the price hits a new low but the deviation rate doesn't confirm a new low, often a sign of a bottom rebound. This dual confirmation method is much more reliable than relying solely on extreme values.

Regarding trading strategies, I suggest not using the deviation rate as the main signal. Its best use is as a warning indicator—when the S&P 500 deviation rate hits -5%, for example, consider gradually deploying long-term spot positions rather than opening leveraged, heavily weighted positions. Combining it with other indicators like RSI can be more effective; for instance, when RSI enters oversold territory and the deviation rate is also at an extreme negative, the signs of a bottom are more credible.

Parameter settings should be adjusted according to your trading style. Short-term traders might use 5-day or 10-day moving averages to catch very short-term fluctuations; swing traders might use 20-day moving averages to assess medium-term overheating; long-term investors might use 60-day moving averages to identify major overbought or oversold conditions over larger cycles.

Finally, a reminder: when the market is in a strong trend, the deviation rate can become less responsive, and prices may stay far from the moving average for a long time without immediately reverting. In such cases, sideways consolidation often replaces a decline, and a new upward wave may follow. Therefore, the BIAS indicator is just an auxiliary tool; the trend is the main focus. Indicators can deceive, but ultimately, prices tend to revert to the mean—that's the market's fundamental truth.