Recently, a friend asked me how to use the divergence rate to judge stock buy and sell points. I found that many people are still a bit confused about this indicator. So today, I’ll share my understanding.

To put it simply, the divergence rate is an indicator that measures how far the stock price has moved away from its moving average. In English, it’s called BIAS. A simple way to understand it is: how big is the gap between the current stock price and the moving average. This indicator is especially suitable for finding short-term overbought and oversold opportunities—such as when the stock price has risen too ridiculously or fallen too sharply.

Let me explain with a more relatable example. Imagine a year of a bountiful harvest, when rice yields are particularly good, and the market price of rice suddenly jumps to a historical high. The farmers see this price and think it might be the peak, so they rush to sell, and even start cutting prices. Why? Because they’re afraid that once the buyers have collected enough grain, they won’t buy anymore—then there will be no demand. This mindset is actually similar to investors in the stock market: when stock prices rise too high, everyone starts selling; when stock prices fall too low, everyone starts buying the dip. The divergence rate is used to capture these kinds of extreme situations.

The calculation method isn’t complicated. The formula is: (Closing price of the day − N-day moving average price) divided by the N-day moving average price, then multiplied by 100. The most commonly used periods are the divergence rates for 5 days, 10 days, and 30 days.

How do you use it? In a weak market, when the divergence rate exceeds 5, it indicates overbought conditions, and you can consider selling. If it falls to −5, it’s over sold/oversold, and you can consider buying. If it’s a strong market, the standard should be loosened: over 10 is considered overbought, and below −10 is considered oversold. I’ve seen examples on Eastmoney—when the 24-day divergence rate is greater than 10, there is usually a round of quick rebound. At that time, you can keep holding or reduce your position in moderation. Conversely, if the divergence rate drops below −15, that’s a good opportunity for “buying on a low,” and you should not panic-sell. Consider the rebound before making your move.

As for how to set it up, on many trading platforms you can bring up the divergence rate indicator directly. For example, on Eastmoney, after selecting a stock, look for BIAS in the indicator panel below, and you’ll be able to see the real-time changes in the divergence rate. If you want to adjust the parameters yourself, just click the BIAS parameters in the system indicator settings and change them to a suitable period based on your trading habits. I recommend setting up alert signals, so you can continuously track your watchlist and greatly improve the safety of your trading.

However, you should note that the divergence rate also has limitations. First, it’s not very effective for stocks that rise and fall slowly over the long term with very small volatility. Second, the divergence rate is a lagging indicator, so it may miss the best timing. Therefore, it’s not recommended to use it alone for selling; it can be used as a reference for buying. In addition, the accuracy of the divergence rate varies greatly between large-cap and small-cap stocks. Large-cap stocks are relatively stable, so using the divergence rate to judge tends to be more reliable. Small-cap stocks are easier to manipulate, and it’s difficult to determine anything accurately using the divergence rate alone.

The most important point is this: never make a decision based only on one indicator—the divergence rate. It’s best to combine it with other indicators, such as KD and Bollinger Bands, to make the judgment more accurate. Parameter selection is also crucial. If the period is too short, the indicator becomes overly sensitive and leads to frequent trading. If the period is too long, it becomes less responsive and can miss opportunities. Also, rebound speed differs between stocks of good companies and those of poor companies: when a stock with good performance is oversold, everyone rushes to buy, and the rebound happens quickly; but a poorly performing stock may not rebound for a long time. All of these need to be considered flexibly.

Overall, the divergence rate is a good auxiliary tool, but to achieve its maximum value, you need to use it flexibly together with market conditions and other indicators.