Mastering the Divergence Rate to Find Buy and Sell Points: A Practical Guide from Overbought/Oversold to Precise Entry

In trading, the most difficult aspect to grasp is “timing.” Many investors tend to chase in only after prices have already surged significantly or cut losses only after a sharp decline. Bias (BIAS), as a classic technical tool, is designed to help traders identify these extreme moments.

What is Bias (BIAS)? A psychological indicator expressed in numbers

Bias (BIAS), in a nutshell, measures the “distance between the stock price and the moving average line.” When the investor sentiment is overly optimistic, the stock price will be far above the average cost line; when the sentiment is overly pessimistic, the price will be well below the average cost line—BIAS is a tool to quantify this collective psychology.

Specifically, Bias can be categorized into two situations:

• Positive Bias: Stock price above the moving average, indicating an overbought condition
• Negative Bias: Stock price below the moving average, indicating an oversold condition

The core logic is simple: the farther the deviation, the stronger the tendency to revert. Imagine a spring being pushed down forcefully—the more it is compressed, the more forcefully it bounces back.

How to calculate Bias? Mastering this formula is enough

Calculation formula: N-day BIAS = ((Closing Price on Day N - N-day Moving Average) / N-day Moving Average

In simple terms, you need to:

1. Calculate the N-day moving average (sum the prices of the past N days and divide)
2. Subtract this average from today’s closing price
3. Divide the result by the average to get the percentage, which is the Bias

Example: If the 5-day moving average is 100 yuan, and today’s closing price is 105 yuan, then the 5-day Bias = )105 - 100( / 100 = 5%

Note that the moving average itself has lag, so Bias also does not react instantaneously. This is an important factor to consider when using it.

How to set Bias parameters for practical use?

The key to setting Bias is choosing appropriate cycle parameters:

Based on trading cycles:

• Short-term trading: 5-day, 6-day, 10-day, 12-day Bias are most common
• Mid-term holding: 20-day, 60-day Bias suitable for observation
• Long-term investing: 120-day, 240-day Bias used for trend judgment

Practical considerations for parameter selection:

• Shorter cycles make the indicator more sensitive, suitable for active stocks; longer cycles produce a more stable indicator, suitable for low-volatility stocks
• In high-volatility markets, you may need to widen thresholds; in low-volatility markets, thresholds can be tighter
• The optimal parameters for a stock can vary under different market conditions

It is recommended for beginners to start practicing with common parameters like 6-day, 12-day, and 24-day.

Practical methods for using Bias to find buy and sell points

Set overbought and oversold warning lines:

First, establish two key levels—assuming a 5-day Bias, you might set:

• Positive threshold at +2% to +3%: exceeding this indicates overbought
• Negative threshold at -2% to -3%: below this indicates oversold

Specific entry logic:

Advanced methods to improve accuracy:

1. Multiple moving averages: Monitor both 5-day and 20-day Bias simultaneously; combining short-term and mid-term signals helps filter out false signals

2. Observe divergence phenomena:

   • Price hits new highs but Bias does not → potential top
   • Price hits new lows but Bias does not → potential bottom

3. Combine with other indicators: Bias works best when used with tools like KD, stochastic oscillator, Bollinger Bands, etc., to improve success rates

Limitations of Bias you must be aware of

1. Ineffective for low-volatility stocks: If a stock is in a long-term sideways trend, Bias will frequently fluctuate between positive and negative thresholds, creating false signals

2. Lagging issue: Since the moving average itself lags, Bias may react too slowly during rapid reversals

3. Not suitable for all stocks: Large-cap stocks tend to have more regular movements, making Bias judgments more reliable; small-cap stocks with abnormal volatility reduce Bias reliability

Three recommendations when using Bias to find buy and sell points

First, adjust parameters flexibly: Don’t rigidly apply the same thresholds. Stocks with stable performance rebound quickly, while weaker stocks rebound slowly; parameters should be fine-tuned based on stock characteristics.

Second, combine with other tools: Relying solely on Bias can lead to pitfalls. Using it alongside stochastic indicators, Bollinger Bands, etc., can significantly improve trading success, especially during oversold rebounds.

Third, avoid overtrading: A Bias signal does not necessarily mean you must act immediately. In uncertain situations, it’s better to miss a trade than to enter recklessly. Risk management always comes first.

Bias (BIAS) is a concise and powerful tool, but no indicator is perfect. Truly skilled traders are those who understand both its advantages and limitations. Continuous learning and ongoing optimization are the keys to surviving and thriving in trading.