## Master the Deviation Rate Settings with the BIAS Indicator for Precise Bottom Picking and Top Escaping

In trading markets, price fluctuations often exceed participants' expectations. The **Deviation Rate (BIAS)** is a key indicator used to capture this kind of expectation bias. When the stock price diverges increasingly from the moving average, it often signals an imminent reversal point.

## Practical Application: How to Read Buy and Sell Signals from BIAS

To use the deviation rate to find genuine buy and sell opportunities, you need to set two threshold values—positive and negative parameters. These are not fixed numbers but should be dynamically adjusted based on the stock's volatility characteristics and market environment.

**Overbought Signal**: When BIAS exceeds the positive parameter (e.g., set at +2% or +3%), it indicates that the stock price has risen excessively relative to the moving average, facing potential correction pressure. This is a good time to consider selling or reducing positions.

**Oversold Signal**: When BIAS falls below the negative parameter, it suggests that the stock has declined too much, and the distance from the moving average is too wide. The rebound energy is building up, so consider buying on dips. However, be cautious—if the stock's fundamentals are poor, even oversold conditions may not lead to a quick rebound.

Monitoring multiple moving averages' deviation rates in conjunction is also important. The 5-day MA deviation reflects short-term sentiment, while the 20-day MA deviation indicates medium-term trend. Combining these can better reveal structural market changes.

Additionally, pay attention to **divergence phenomena**: if the stock price hits a new high but the deviation rate does not, it could be a top signal; similarly, if the price hits a new low but the deviation rate does not, it may indicate a bottom approaching.

## How the Deviation Rate is Calculated and How to Set Parameters

The calculation formula for deviation rate is straightforward: **N-day BIAS = (Closing Price on Day ( - N-day Moving Average) / N-day Moving Average**

Here, the N-day moving average is the arithmetic mean of prices over the specified period. Essentially, this formula expresses the deviation of the stock price from its trend line as a percentage—positive when above the average, negative when below.

**The core of setting the deviation rate** lies in choosing an appropriate N.

Short-term traders typically select 5, 6, 10, or 12-day moving averages, making BIAS more sensitive to capture short-term fluctuations. Medium-term investors might choose 20 or 60 days, while long-term investors prefer 120 or 240 days.

Parameter selection should consider two dimensions:

**Stock Characteristics**: Highly active stocks with large volatility are better suited for short-cycle BIAS; less active stocks may benefit from longer periods.

**Market Sentiment**: In a bull market, overbought signals may occur frequently without immediate reversals, so raising the positive threshold is advisable. In a bear market, oversold signals often have limited rebound strength, requiring adjustments to the negative threshold.

## The Underlying Logic of Deviation Rate: Why Deviations Lead to Corrections

Imagine a bumper harvest year in the agricultural market, where rice prices hit record highs. Most farmers rush to sell, fearing they might miss the opportunity. This psychological "excessive expectation" of reversal is even more evident in the stock market.

When the stock price is far above the moving average (high positive deviation), it indicates that short-term buyers have pushed prices up significantly. Profit-taking and risk-averse investors start to sell. Conversely, when the price is far below the average (low negative deviation), panic has been fully released, creating an opportunity for long-term buyers to enter.

## Limitations of Using the Deviation Rate

**Lagging Risk**: Since the deviation rate is based on moving averages, which are inherently lagging indicators, signals often appear after a trend has already formed. This can cause missed optimal entry or exit points. Therefore, relying solely on deviation rate for selling is not recommended, but it can be useful for identifying buying opportunities.

**Limited Applicability**: Stocks with very low volatility or in prolonged consolidation phases may not produce meaningful deviation signals. Also, large-cap stable stocks and small-cap volatile stocks require different parameter settings; using a one-size-fits-all approach can lead to significant misjudgments.

**Need for Other Indicators**: Relying solely on deviation rate can lead to false signals. Combining BIAS with other indicators like stochastic (KD), Bollinger Bands (BOLL), etc., can improve accuracy. For example, BIAS + KD is suitable for rebound scenarios, while BIAS + Bollinger Bands is better for oversold rebounds.

In summary, there is no fixed standard for setting the deviation rate; it requires continuous adjustment based on the specific stock, cycle, and market phase during actual trading. Stable stocks with good performance rebound quickly during declines, while unstable stocks may remain oversold for a long time—experience and judgment are essential.