Recently, in the community, I’ve seen many people ask about technical indicators—and the one that comes up the most is the divergence rate. Honestly, this indicator looks simple, but to use it well really does take practice. I’d like to share my own experience and talk about how to set moving-average divergence rates and how to apply them in real trading.

First, let’s talk about what divergence rate is. Simply put, it is an indicator that measures the distance between the stock price and the moving average. When the stock price rises above the moving average, it’s a positive divergence; when it falls below the moving average, it’s a negative divergence. The core logic of this indicator is actually very straightforward: it reflects market participants’ expectations of price. When the price deviates too far from the moving average, it often means a pullback or a rebound is coming. I often use agricultural product prices as an analogy: in bumper harvest years, rice prices surge, everyone rushes to sell, and in the end, prices will inevitably fall. Stocks follow the same principle.

When it comes to setting moving-average divergence rates, this is where many people easily run into pitfalls. First, you need to choose the period for the moving average. For the short term, people usually look at 5-day and 10-day; for the medium term, 20-day and 60-day; and for the long term, 120-day and 240-day. Next is parameter selection—common divergence rate settings are 6-day, 12-day, and 24-day. There is no absolute “right” answer here; you have to adjust based on the trading activity of the stock you trade and overall market sentiment. For highly active stocks, divergence rate parameters on shorter cycles tend to be more sensitive and respond faster.

So how do you use this indicator to find buy and sell points? My approach is to set a positive threshold and a negative threshold. For example, for the 5-day divergence rate, I would set it at +2% to +3%. When the divergence exceeds the positive threshold, it indicates the market is overbought—at that point, you may consider reducing positions or selling. Conversely, when it falls below the negative threshold, it indicates the market is oversold—then you may consider setting up buy orders. But here’s a key point: don’t operate mechanically just by the numbers; you need to combine the market environment and make flexible adjustments. In high-volatility markets, divergence rates will frequently touch the thresholds, and relying on only this one indicator makes it easy to get fooled by fake moves.

From my real trading experience, it’s best to look at the divergence rates of multiple moving averages at the same time—for example, combining the 5-day and 20-day—to get a more complete view of short-term and medium-term trends. There’s also a very important technique called divergence. If the stock makes a new high but the divergence rate doesn’t make a new high, this is often a top signal. The opposite is also true.

But to be honest, the divergence rate also has clear limitations. It doesn’t work well for stocks that rise or fall slowly over the long term, because if there’s no volatility, there’s no divergence. Also, this indicator has lag, so I generally don’t recommend using it to decide when to sell; using it as a reference for buying is still okay. In addition, using the same set of parameters for large-cap and small-cap stocks produces very different results. Large-cap stocks are more stable, so divergence-based judgments are more accurate, but small-cap stocks are more volatile—relying on divergence rate alone makes it hard to judge.

My own approach is to combine divergence rate with indicators like the stochastic oscillator and Bollinger Bands. Using divergence rate together with the KD indicator can make rebound actions more timely, while pairing it with Bollinger Bands is better suited for buying during oversold rebounds. Parameter selection also matters a lot: too short leads to overreactions, while too long makes it overly slow and dull. Finally, after a drop, stocks with good performance tend to rebound quickly because everyone is afraid of missing out, whereas stocks with poor performance may take a long time to rebound—this is something you should keep in mind. In short, there are no hard-and-fast rules for setting moving-average divergence rates. The key is to continuously optimize and adjust according to your trading style and the market situation.