Recently, some friends asked me how to interpret the deviation rate, so I organized the core logic of this technical indicator.

Speaking of the stock market, the hardest thing to predict is actually human sentiment. Investors' expectations of prices directly influence market trends, and the Bias (BIAS) indicator is used to capture these expectation changes. In simple terms, the deviation rate measures how far the stock price deviates from the moving average line, expressed as a percentage.

Imagine a bumper harvest year in the agricultural market, where rice prices soar, and everyone thinks this is the yearly peak, so they rush to sell. Investing in stocks follows the same logic—when prices rise excessively, people anticipate a decline and sell in advance; the opposite is also true. This is the psychological expectation reflected by the deviation rate.

The deviation rate is divided into positive deviation and negative deviation. When the stock price is above the moving average, it’s positive deviation; below it’s negative deviation. When the deviation rate is too high or too low, it usually indicates overbought or oversold conditions, which could be turning points.

How to specifically apply it? First, set parameters. Short-term commonly uses 5- and 10-day moving averages, mid-term uses 20- and 60-day, long-term uses 120- and 240-day. Choose appropriate cycles based on the stock’s activity level and market sentiment—more active stocks respond better to short cycles, while stable stocks are better suited to longer cycles.

After setting parameters, how to interpret the deviation rate to find buy and sell signals? Generally, when BIAS exceeds a positive threshold, it indicates overbought conditions, suggesting reducing positions; when it falls below a negative threshold, it indicates oversold conditions, possibly a buying opportunity. But these thresholds don’t have fixed numbers; they are usually around 2% to 3%, and should be flexibly adjusted based on individual stocks and market environment.

An advanced approach is to combine deviation rates of multiple moving averages, such as observing both 5-day and 20-day BIAS, for a more comprehensive view of short- and medium-term trends. Also, pay attention to divergences—if the stock price hits a new high but the deviation rate doesn’t follow, it could be a top signal; if the stock hits a new low but the deviation rate doesn’t, it might indicate a bottom.

It’s important to note that the deviation rate has limitations. For stocks with long-term slow rises and falls, or very small fluctuations, the effect of the deviation rate is limited. Also, since the deviation rate has a lag, it’s more suitable as a reference for buying decisions; caution is needed when using it for selling. The performance also varies with market capitalization—large-cap stocks tend to give more reliable signals with deviation rate, while small-cap stocks are more uncertain.

Most importantly, don’t rely solely on the deviation rate as the only judgment criterion. Combining it with other tools like the stochastic indicator KD, Bollinger Bands, etc., can improve accuracy. Parameter selection is also critical—too short a cycle reacts excessively; too long, it reacts slowly. Moreover, stocks with good fundamentals rebound quickly when falling, while poor-performing stocks rebound slowly—these factors require flexible judgment.

The Bias (BIAS) deviation rate looks simple, but mastering it requires considerable practical experience. If interested, try it in simulated trading, adjusting parameters and strategies through actual practice, so you can truly grasp this indicator.