Understand the moving average divergence setting and grasp the buy and sell signals before the stock price reverses

Investors often say “extremes must revert,” and the Moving Average Deviation Rate setting is a tool to help us find reversal opportunities during extreme price fluctuations. The deviation rate (BIAS) may seem complicated, but as long as you grasp the key points of setting and usage, it can become a powerful weapon in your arsenal.

What exactly is the Deviation Rate measuring?

Deviation Rate (Bias Ratio, BIAS) essentially measures the “degree to which the stock price deviates from the moving average line.” To put it more plainly: it tells you whether the current stock price is overvalued or undervalued.

• Stock price significantly above the moving average line → Positive Deviation Rate → Possibly overbought
• Stock price significantly below the moving average line → Negative Deviation Rate → Possibly oversold

The core logic of this indicator is simple: when the stock price deviates too far from the trend line, the market often self-corrects.

Practical Approach: How to build a buy/sell signal system

To use the deviation rate for practical trading, the first step is Moving Average Deviation Rate setting.

1. Choose a suitable moving average period

• Short-term trading (holding for days to weeks): choose 5-day, 10-day, or 12-day moving averages
• Mid-term trading (holding for weeks to months): choose 20-day or 60-day moving averages
• Long-term investing: choose 120-day or 240-day moving averages

2. Set BIAS parameters and buy/sell thresholds

Common parameter combinations: 6-day, 12-day, 24-day. But the key is not in the parameters themselves, but in adjusting thresholds based on individual stock characteristics:

• Stocks with high activity: shorter cycle BIAS is more sensitive, thresholds can be wider
• Stocks with stable volatility: longer cycle BIAS is smoother, thresholds should be stricter

For example, for 5-day deviation rate, set positive threshold at 2%–3% (overbought warning), negative threshold at -2%–-3% (oversold opportunity).

3. Set buy/sell rules

• BIAS > positive threshold → Overbought signal, consider reducing holdings or selling
• BIAS < negative threshold → Oversold signal, consider increasing holdings or buying

How to calculate the deviation rate? A thorough understanding of the formula