How to Use Divergence Rate to Find Buy and Sell Points: From Basics to Practical Guide

In stock trading, many investors are looking for a simple and effective tool to help determine entry and exit points. The Bias Ratio (BIAS) is a widely used technical indicator for this purpose. This article will help you understand the principles behind BIAS and teach you how to practically use it to find buy and sell signals, avoiding common pitfalls.

What is Bias Ratio? A 3-Minute Quick Introduction

The Bias Ratio (BIAS) is a classic indicator in technical analysis that expresses the deviation of a stock’s price from its moving average in percentage terms. Simply put, when the price deviates from its average trend, the Bias Ratio changes accordingly, helping us judge whether the market is overbought or oversold.

Difference between positive and negative Bias Ratio:

• When the price is above the moving average, it is called a positive Bias Ratio, which usually indicates a potential risk of a price correction.
• When the price is below the moving average, it is called a negative Bias Ratio, often suggesting a potential rebound opportunity.

Imagine a harvest year in the agricultural market: rice production surges, and prices soar to historic highs. Most farmers think this is the peak of the year and worry about market saturation, rushing to sell. This psychological state mirrors stock investors’ behavior—when prices rise too much, investors anticipate a decline and sell early; conversely, when prices fall too deeply, investors may rush to buy.

The Core Logic of Finding Buy and Sell Points: The Role of Positive and Negative Parameters

To use Bias Ratio for identifying buy and sell signals, you first need to set two reference values—positive and negative parameters. These values act like warning lines for stock prices; when the Bias Ratio exceeds these thresholds, buy or sell signals are triggered.

Overbought and selling opportunities: When the Bias Ratio exceeds the positive threshold (e.g., +2% or +3%), it indicates the price has deviated significantly above the moving average, signaling an overbought condition. At this point, the price may lose upward momentum, and it might be prudent to sell or reduce holdings.

Oversold and buying opportunities: Conversely, when the Bias Ratio falls below the negative threshold, it indicates the price has dropped significantly below the moving average, signaling an oversold condition. This often comes with rebound momentum, making it a good time to consider buying.

How to Set Bias Ratio Parameters? Short-term vs. Long-term Strategies

The choice of Bias Ratio parameters directly affects the sensitivity of the signals. Different investment styles and market environments require different parameter combinations.

Parameters for short-term traders: Short-term traders typically focus on 5-day, 6-day, or 10-day Bias Ratios. These short-cycle parameters make the indicator more sensitive, allowing them to capture buy and sell points within short-term fluctuations. For highly active, volatile stocks, shorter Bias ratios are often more suitable.

Parameters for medium-term investors: Medium-term investors may choose 20-day or 60-day moving averages as references, with parameters like 12-day or 24-day Bias Ratios. These provide moderate sensitivity, balancing signal frequency and accuracy.

Long-term investor strategies: Long-term investors can focus on 120-day or 240-day Bias Ratios, which change more slowly and are suitable for tracking medium to long-term trends.

Three considerations for flexible adjustment:

• Stock trading activity: Highly traded stocks tend to have larger fluctuations, requiring threshold adjustments.
• Overall market sentiment: Bullish and bearish markets show different Bias Ratio behaviors.
• Historical data reference: Adjust parameters based on past extreme Bias Ratio values for the stock.

Three Common Traps When Using Bias Ratio to Find Buy and Sell Points

Even with a good understanding of the Bias Ratio, many investors still fall into traps when applying it in practice. Recognizing these pitfalls is crucial.

Trap 1: Indicator lag causes delayed signals Since the Bias Ratio is based on moving averages, which are inherently lagging indicators, signals often appear after the price has already moved significantly. This can lead to missing optimal entry points or taking on larger risks. Therefore, Bias Ratio is more suitable for identifying buy signals, while sell signals should be approached cautiously.

Trap 2: Different applicability for stocks of varying sizes Large-cap, highly liquid stocks tend to have more stable fluctuations, making Bias Ratio judgments more reliable. Small-cap stocks can be more unpredictable, and relying solely on Bias Ratio may lead to inaccurate decisions. Additionally, stocks in a prolonged sideways or slow trend offer limited trading opportunities using Bias Ratio.

Trap 3: Ignoring fundamental differences Stocks with strong fundamentals and lower risk tend to rebound quickly after declines, as investors are eager not to miss buying opportunities. Conversely, weaker or more unstable stocks may take longer to bottom out before rebounding. Relying solely on Bias Ratio can cause misjudgment of market reactions.

Combining Other Indicators to Improve the Accuracy of Bias Ratio Signals

Using Bias Ratio alone can lead to false signals. Combining it with other technical indicators can significantly improve the success rate of buy and sell signals.

Bias Ratio + KD Indicator: Enhancing rebound timing When the Bias Ratio indicates an oversold condition, and the KD indicator confirms a bottom, the reliability of a buy signal increases. This combination is especially effective for timely and precise entries during rebound phases.

Bias Ratio + Bollinger Bands (BOLL): Capturing oversold rebounds The upper and lower bands of Bollinger Bands, combined with Bias Ratio, can more accurately identify buy points during oversold rebounds. When the stock price touches the lower band and the negative Bias Ratio threshold, the rebound opportunity is often more certain.

Observing divergence phenomena to increase judgment accuracy:

• If the price hits a new high but the Bias Ratio does not, it may signal an impending top.
• If the price hits a new low but the Bias Ratio does not, it may indicate a bottom formation.

Such divergence signals are often reversal signs, and investors should pay close attention.

Practical Tips for Using Bias Ratio to Find Buy and Sell Points

Effective use of Bias Ratio requires flexibility and avoiding mechanical operations. Based on market conditions and individual stock characteristics, investors should:

1. Choose parameters aligned with your trading cycle; short-term traders need not focus on long-term Bias Ratios.
2. Regularly review and adjust thresholds, especially when market styles shift.
3. Always analyze in conjunction with multiple moving averages, such as observing both 5-day and 20-day Bias Ratios.
4. Cross-verify with other indicators to increase the credibility of signals.
5. Pay attention to fundamental changes in stocks to prevent technical signals from overriding market realities.

Bias Ratio (BIAS) is a simple and intuitive technical analysis tool, but no indicator is perfect. Successful investors deepen their understanding of how to find buy and sell points with Bias Ratio, combine it with market practice, and continuously refine their strategies. If you’re interested in trading, practice these strategies repeatedly in a demo account, and once confident, apply them with real funds.