Master Moving Average Divergence Rate to Find Buy and Sell Points — An Essential Technical Analysis Tool for Investors

In stock trading, investors’ expectations of future price movements often determine the direction of market volatility. The Bias Ratio is an important technical indicator used to capture these market expectation changes. This article will explore how to identify buy and sell points through the Bias Ratio, as well as related settings and application methods.

What is the Bias Ratio? Why do investors need to pay attention to it

Bias Ratio(, also known as BIAS), fundamentally quantifies the deviation between the stock price and the moving average line, usually expressed as a percentage. It is a key indicator for judging whether a stock is overbought or oversold.

Simply put, when the stock price significantly deviates from its trend, the market is highly likely to experience a correction or rebound; conversely, if the stock price runs close to the trend line, the current trend will continue. This also explains why investors often say “extremes will revert”—when rice harvests lead to soaring prices, farmers rush to sell, just as investors start reducing positions when stock prices skyrocket.

Based on the position of the stock price relative to the moving average line, the Bias Ratio is divided into two categories: positive Bias when the price is above the moving average, and negative Bias when below.

Calculation logic and principles of the Bias Ratio

To accurately apply the Bias Ratio, it is essential to understand its calculation formula:

N-day BIAS = ((Closing Price of the Day - N-day Moving Average Price)) / N-day Moving Average Price

where the N-day moving average is the arithmetic mean of the closing prices over the past N trading days. Since the moving average itself has a lagging feature (used to observe short-term price trend changes), the derived Bias Ratio also inherently lags in time, which is an important limitation investors need to recognize.

How to scientifically set Bias Ratio parameters

Setting the Bias Ratio involves two core decisions:

First, choose an appropriate moving average period:

• Short-term traders may select 5-day, 6-day, 10-day, or 12-day moving averages
• Mid-term investors prefer 20-day or 60-day moving averages
• Long-term holders focus on 120-day or 240-day moving averages

Second, determine the N value for the Bias Ratio parameter: common choices are 6, 12, or 24 days. Shorter periods increase the indicator’s sensitivity, while longer periods make it more stable. When selecting parameters, consider:

• The liquidity of the target stock (highly active stocks can use shorter periods)
• The overall market sentiment (optimistic or pessimistic)

Practical methods for using moving average Bias to find buy and sell points

To effectively utilize the Bias Ratio, two threshold values—positive and negative—must be set. For example, a 5-day Bias Ratio might have thresholds around 2% to 3%, but these should be flexibly adjusted based on historical data and personal experience. In highly volatile markets, the Bias Ratio may frequently break through thresholds, so investors need to adjust parameters or incorporate other judgment criteria.

Key signal identification:

• When BIAS exceeds the positive threshold, it indicates overbought conditions, suggesting selling pressure and potential exit points
• When BIAS falls below the negative threshold, it indicates oversold conditions, signaling buying opportunities and potential entry points

Advanced analysis techniques: combining the Bias Ratios of multiple moving averages (e.g., 5-day and 20-day) can provide a more comprehensive view of short-term and medium-term trends. Additionally, observing divergence phenomena—if the price hits a new high but the Bias Ratio does not, it may signal a market top; conversely, if the price hits a new low but the Bias Ratio does not, it could indicate a bottom.

Practical limitations of the Bias Ratio indicator

In practice, it is important to recognize three major constraints of the Bias Ratio:

1. Limited effectiveness on low-volatility stocks: When stocks are in a prolonged mild uptrend or slight decline, the Bias Ratio’s effectiveness diminishes significantly.

2. Lagging effect impacts decision-making: Due to its lagging nature, the indicator may fail at precise sell points, but it still holds value as a buy reference.

3. Differences based on market capitalization: Large-cap stocks tend to have stable, predictable movements, making the Bias Ratio more accurate; small-cap stocks are more volatile and uncertain, making it difficult to rely solely on the Bias Ratio for judgment.

Recommendations to improve Bias Ratio application effectiveness

Use multiple indicators together: Relying solely on the Bias Ratio can lead to errors; it should be combined with tools like the stochastic indicator(KD), Bollinger Bands(BOLL), etc. Combining the Bias Ratio with stochastic indicators can help grasp more precise entry and exit points during rebounds, while pairing it with Bollinger Bands is more suitable for oversold rebound buying opportunities.

The art of parameter selection: Setting periods too short may overreact to market noise, while too long periods may respond too slowly. Repeated testing in practice is necessary to find the most suitable parameters.

Differentiated application strategies: High-quality, low-risk stocks tend to rebound quickly during declines due to investors’ fear of missing buying points; stocks with unstable earnings may rebound more slowly, requiring different strategies.

As a concise and intuitive technical analysis tool, the Bias Ratio provides investors with an effective way to quantify overbought and oversold conditions. However, since many market analysis indicators exist, the Bias Ratio is just one dimension. Investors should continuously learn and practice to gradually improve their trading systems.