## Complete Guide to BIAS Divergence: How to Set Parameters to Find the Best Buy and Sell Points

In the investment market, behind price fluctuations are participants' psychological expectations. **BIAS (Bias)** is a technical indicator that intuitively reflects these expectations. However, many traders struggle with the question of "how much should I set the BIAS parameters?" This article delves into the core logic and practical applications of BIAS.

## Understanding BIAS: The Relationship Between Stock Price and Moving Average

**What is BIAS?** Simply put, it measures "how far the current stock price is from the moving average," expressed as a percentage.

When the stock price is above the moving average, we call it **positive BIAS**; when below, it is **negative BIAS**. The core function of this indicator is to determine whether the stock is overbought or oversold.

Imagine a scenario: a product suddenly becomes very popular, and its price skyrockets to an unprecedented high. Smart merchants sense that the rise cannot continue forever and start selling off in large quantities; meanwhile, ordinary consumers worry they might miss the opportunity if they don't buy now, leading to frantic purchasing. This is the "extreme reversal" phenomenon in the market, which BIAS aims to capture as market psychology.

## The Calculation Logic of BIAS

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

The moving average is an average price over a period, with a lagging characteristic. Therefore, the BIAS calculated based on it also lags. Recognizing this limitation is essential when using BIAS.

## How to Set the Most Suitable BIAS Parameters?

### Step 1: Choose the appropriate cycle

- **Short-term trading** (5-10 days): suitable for intraday or short-term traders, highly sensitive but prone to false signals
- **Mid-term trading** (20-60 days): balances sensitivity and reliability, the most common choice
- **Long-term holding** (120-240 days): suitable for value investors, signals are fewer but more accurate

### Step 2: Determine the N value

Common BIAS parameters include 6, 12, 24 days. However, "how much to set" is not fixed; it should be adjusted based on:

**Stock Liquidity:** Highly liquid stocks respond better to shorter cycles; less liquid stocks require longer cycles to filter noise.

**Market Environment:** In a bull market, stock prices tend to hit new highs, so BIAS thresholds should be raised; in a bear market, thresholds should be lowered to avoid missing rebounds.

**Historical Volatility:** Stocks with high volatility can have wider positive/negative thresholds (e.g., ±5%), while low-volatility stocks need tighter thresholds (around ±2%).

### Step 3: Set overbought and oversold thresholds

This is the key step in "how much BIAS to set." The usual approach is:

- **Positive threshold (overbought):** generally +3% to +5%
- **Negative threshold (oversold):** generally -3% to -5%

However, these values are not rigid. In highly volatile markets, thresholds need to be dynamically adjusted. It is recommended to backtest with historical data to find the BIAS levels where reversals often occur for the specific stock, then adjust accordingly.

## Practical Application: How to Use BIAS to Find Buy and Sell Points

**When BIAS exceeds the positive threshold**, it indicates the stock is in an overbought zone with downward pressure; consider reducing holdings or selling. But this is not an absolute signal; it should be combined with other confirmations.

**When BIAS falls below the negative threshold**, it indicates the stock is oversold with rebound potential; consider gradually building positions. This signal is more reliable in an overall upward trend.

**Observing divergence phenomena** is crucial. If the stock price hits a new high but BIAS does not, it warns of a potential top; conversely, if the stock hits a new low but BIAS does not, it may signal a bottom.

**Combine with multiple moving averages:** observing the changes in 5-day, 20-day, and 60-day BIAS can provide a more comprehensive understanding of short-, medium-, and long-term market conditions.

## Common Misconceptions and Remedies in Using BIAS

Although intuitive, BIAS has clear limitations:

**Limitation 1: Ineffective in consolidation phases.** When stocks fluctuate within a narrow range for a long time, BIAS remains in dead zones, providing no signals.

**Limitation 2: Prone to false signals.** As a lagging indicator, using BIAS to chase high prices can easily lead to missed opportunities or being caught in reversals.

**Limitation 3: Poor applicability to small-cap stocks.** Large-cap blue-chip stocks tend to be more stable, making BIAS judgments more reliable; small-cap stocks often have abnormal volatility, making BIAS less effective.

Therefore, **never rely solely on BIAS**. It should be used in conjunction with other tools like the KD indicator, Bollinger Bands, etc. Especially when seeking rebound buy points after oversold conditions, combining BIAS with Bollinger Bands yields the best results.

## Three Tips to Improve BIAS Trading Success Rate

**1. Adjust parameters flexibly.** Don’t stick to the same settings; dynamically change thresholds according to market cycles.

**2. Differentiate stock quality.** Stable blue-chip stocks tend to rebound quickly when falling because institutional funds rush to buy the dip; poor-performing stocks may rebound slowly or continue declining even when oversold.

**3. Combine with trend analysis.** In an uptrend, buy signals from negative BIAS are more effective; in a downtrend, positive BIAS signals are more reliable. Trading with the trend always outperforms counter-trend strategies.

In summary, BIAS is a concise and powerful tool, but it requires a thorough understanding of its principles and limitations to maximize its effectiveness in practice. Once you master the core principles of "how much to set BIAS," continuous backtesting and parameter optimization are necessary to turn it into a stable trading advantage.