How to interpret the BIAS indicator? A quick guide to identifying buy and sell signals using the divergence rate

What is the Bias Rate, and Why Learn How to Read It

The Bias Rate, abbreviated as BIAS in English, is a comparison indicator. Simply put, it tells you how far the current stock price is from its moving average. When the stock price deviates significantly from the moving average, the market often exhibits an “overextended” phenomenon—either rising too rapidly or falling too sharply—creating potential reversal opportunities.

Why focus on how to read the Bias Rate? Because it helps you identify two key moments: the selling opportunity when a stock is overvalued, and the buying opportunity when it is undervalued.

The Core Logic of the Bias Rate: Degree of Price Deviation from the Moving Average

Imagine a scenario: a stock usually fluctuates around 10 yuan, but suddenly jumps to 15 yuan in one day. This 15 yuan price has a large “deviation” compared to the average of 10 yuan. The Bias Rate measures this deviation in percentage.

The calculation method is straightforward:

N-day BIAS = (Closing Price on Day ( - N-day Moving Average) / N-day Moving Average × 100%

For example, if the 5-day moving average is 10 yuan, and today’s closing price is 12 yuan, then the 5-day Bias Rate is )12 - 10( / 10 × 100% = +20%

How to Quickly Find Buy/Sell Points Using the Bias Rate

This is the part everyone cares about most—how to read the Bias Rate to truly make money.

In a weak market:

• When N-day Bias Rate > +5%, it indicates the stock is overbought, signaling a potential sell; consider exiting.
• When N-day Bias Rate < -5%, it indicates the stock is oversold, signaling a potential buy.

In a strong market (sustained upward trend):

• When Bias Rate > +10%, it’s considered truly overbought, and selling signals are more reliable.
• When Bias Rate < -10%, it’s an oversold signal, and low-cost buying can be considered.

Simply put: the larger the absolute value of the Bias Rate, the farther the price is from the moving average, and the stronger the rebound momentum when it pulls back.

Two Types of Bias Rate You Need to Know

Positive Bias vs Negative Bias:

• Price above the moving average → Positive Bias (market bullish)
• Price below the moving average → Negative Bias (market bearish)

The larger the positive Bias, the greater the profit-taking pressure; the larger the negative Bias, the more attractive a technical rebound becomes.

Bias Rate for Different Periods: Commonly used periods include 5-day, 10-day, 30-day, 60-day, etc. Shorter periods are more sensitive; longer periods are more stable. Traders can choose the appropriate Bias period based on their trading cycle.

How to Set Up and Use Bias Rate on Trading Platforms

For example, in common stock trading software, locate the technical indicators section, search for “BIAS” or “Bias Rate,” and add it directly below the candlestick chart. Most platforms will display default Bias curves for 5-day, 10-day, and 30-day periods.

If custom parameters are needed, modify the period in the indicator settings. It’s recommended to set up alert functions so that when the Bias Rate exceeds your preset thresholds, you receive notifications—helping you catch buy/sell signals timely.

Three Situations Where Bias Rate Becomes Ineffective and Must Be Avoided

Although useful, the Bias Rate has clear limitations. Be aware of these when using it.

First, in ranging markets: When stocks move slowly with small price fluctuations over a long period, the sensitivity of the Bias Rate diminishes, reducing the reliability of signals.

Second, it has lagging characteristics: Since the Bias Rate is based on historical averages, it reacts slowly during rapid market shifts. Using it for sell decisions may lead to losses, but it can still be useful as a reference for buying.

Third, its applicability varies with market capitalization: Large-cap stocks with stable market value produce more accurate Bias signals; small-cap stocks are more susceptible to manipulation, making Bias signals less reliable for judging true trends.

Practical Tips for Using Bias Rate in Trading

1. Always combine with other indicators: Don’t rely solely on the Bias Rate for decisions. Combining with KD or stochastic indicators can improve rebound accuracy; using Bollinger Bands (BOLL) is better for identifying oversold rebound opportunities. Multiple indicators resonating increase signal reliability.

2. Parameter selection is crucial: Short periods are overly sensitive, leading to false signals; long periods react slowly, missing optimal trading points. Choose the period based on your trading style (intraday, short-term, or medium-term).

3. Consider the stock’s quality: Good companies with stable performance tend to rebound quickly after excessive declines, with Bias Rate reflecting this. Junk stocks are more volatile; even if Bias indicates oversold, they may continue to fall, making rebounds uncertain.

Summary

Learning how to read the Bias Rate equips you with a quick method to identify market overextensions. When positive Bias is too large, beware of profit-taking; when negative Bias is too large, look for rebound opportunities. But remember, the Bias Rate is just an auxiliary tool, not a magic bullet. Use it together with market trends, fundamental analysis, and other technical indicators to truly improve your trading success rate.