Complete Guide to Moving Average Divergence Settings: From Beginner to Expert Buy/Sell Signals

Market trends change constantly, and investors often need technical tools to determine whether stock prices are overbought or oversold. The Moving Average Deviation Rate Setting is a powerful tool to help traders identify these extreme conditions. This guide will take you through the fundamentals of this useful indicator, from basic concepts to practical applications, helping you more accurately grasp buy and sell opportunities.

Not familiar with BIAS? Master the core concept of Deviation Rate in One Minute

What is the Deviation Rate (BIAS)? Simply put, it measures the deviation between the stock price and its moving average line, expressed as a percentage. When the stock price moves far away from its average cost line, the deviation rate value increases—whether upward or downward.

Deviation rate has two opposites:

• Positive Deviation Rate: Price above the moving average, indicating potential overbought conditions
• Negative Deviation Rate: Price below the moving average, indicating potential oversold conditions

Imagine a commodity trading market. During a bumper harvest year, rice prices soar well above historical averages, farmers rush to sell, fearing prices will fall. This is positive deviation—overheating. Conversely, during a poor harvest, prices plummet, buyers scramble to purchase, expecting a rebound. This is negative deviation—excessive pessimism. Investors’ psychological expectations drive these extreme fluctuations.

How to set the Moving Average Deviation Rate most effectively

Step 1: Determine the Moving Average Period

The first key decision in setting the deviation rate is choosing the appropriate period:

Short-term traders (1-2 weeks)

• Use 5-day, 6-day, 10-day, 12-day moving averages
• More sensitive, capturing short-term fluctuations

Mid-term investors (holding 1-3 months)

• Use 20-day, 60-day moving averages
• Balance sensitivity and stability

Long-term holders (over 3 months)

• Use 120-day, 240-day moving averages
• Smoother, reducing false signals

Step 2: Set appropriate N parameters

The most common deviation rate parameters are 6-day, 12-day, and 24-day. The correct choice depends on:

1. Stock liquidity

   • Highly liquid stocks: suitable for short periods (6-day, 12-day)
   • Less liquid stocks: suitable for longer periods (20-day, 24-day)

2. Current market volatility

   • High volatility markets: require wider thresholds
   • Low volatility markets: can use stricter thresholds

3. Personal trading style

   • Aggressive: short periods + sensitive parameters
   • Conservative: longer periods + smoothing parameters

Practical tip: Start with a combination of 6-day and 20-day, test 30 trades, and adjust parameters based on success rate.

Step 3: Set buy and sell thresholds

This is the most flexible part of the deviation rate setting. You need to set trigger points for both positive and negative deviation rates:

• Overbought threshold (positive parameter): typically 2%-5%
• Oversold threshold (negative parameter): typically -2% to -5%

However, these numbers vary depending on stock characteristics. Highly volatile tech stocks may need ±3%-4%, while stable financial stocks might only need ±1.5%-2.5%.

Practical tips for using deviation rate to find buy and sell points

Basic signal recognition

When deviation exceeds the positive threshold → Overbought signal

• Price has risen too much, increasing risk of decline
• Action: consider partial profit-taking or reducing position

When deviation falls below the negative threshold → Oversold signal

• Price has fallen too much, increasing rebound chances
• Action: consider partial buy-in or adding to position

Advanced signal: Divergence detection

A high-level technique used by many professional traders, with high accuracy:

Top divergence (strong sell signal)

• Price hits new highs, but deviation rate does not
• Explanation: upward momentum weakens, forming a potential top

Bottom divergence (strong buy signal)

• Price hits new lows, but deviation rate does not
• Explanation: downward momentum diminishes, potential bottom rebound

Multi-moving average combination strategies

Don’t rely on a single period. Combining multiple moving averages can significantly improve success rates:

5-day + 20-day dual system

• 5-day deviation indicates short-term condition
• 20-day deviation confirms medium-term trend
• When both align, signals are most reliable

Example: If 5-day deviation is overbought but 20-day is still neutral, the sell signal is weaker; observe further.

Avoid common pitfalls! Deviation rate misconceptions and solutions

Mistake 1: Blindly trusting the deviation rate

Issue: Stocks with very low volatility or in prolonged consolidation may generate frequent false signals

Solution:

• Use 60-day or 120-day moving averages to filter trend stocks
• Combine with volume confirmation
• Avoid over-trading in sideways markets

Mistake 2: Ignoring indicator lag

Deviation rate is based on historical averages and inherently lagging. During strong rallies, overbought signals may appear while prices are still rising.

Solution:

• Use stochastic indicators (KD) for confirmation (overbought KD + overbought deviation rate is more reliable)
• Confirm with volume (breakout on high volume is stronger)
• Use deviation rate as a reference, not an absolute signal

Mistake 3: Poor parameter selection

Too short a period causes false signals; too long causes missed opportunities.

Solution:

• Keep a trading log, quantify success rates for different parameters
• Use different parameters for different stocks (active stocks: short periods; dull stocks: longer periods)
• Review parameters quarterly

Mistake 4: Overlooking market cap differences

Large-cap blue chips tend to have stable, reliable deviation rates; small caps may show abnormal swings.

Solution:

• For large caps: deviation rate can be used directly
• For small caps: combine with other indicators (BOLL Bollinger Bands, RSI)
• Set more conservative stop-loss points

Complete application framework

Pre-trade checklist

1. ✓ Confirm the stock’s historical volatility (to decide parameters)
2. ✓ Check the trend direction using 60-day or longer MA
3. ✓ Set today’s deviation period and thresholds
4. ✓ Prepare secondary confirmation indicators (KD or BOLL)
5. ✓ Plan stop-loss levels in advance

Signal confirmation process

1. Deviation rate breaks threshold → initial signal
2. Check secondary indicator → KD overbought/oversold aligned?
3. Observe volume → volume expansion or contraction?
4. Cross-check multi-period deviation rates → long-term deviation aligned?
5. Confirm no contradictions → place order and set stop-loss

Key points summary

• Before setting: determine trading period (short/mid/long), choose appropriate moving averages
• Parameters matter: 6-day, 12-day, 24-day are mainstream; adjust based on stock activity
• Thresholds should be flexible: ±2%-5%, verified through live trading
• Signals should be confirmed: deviation rate + stochastic KD + Bollinger Bands, triple confirmation is most reliable
• Risk management: divergence signals are most trustworthy; avoid trading in consolidation zones; always set stop-loss

The setting of moving average deviation rates is not fixed. Market conditions and stock characteristics require traders to continuously adjust parameters. Use it as a tool to observe market overbought/oversold conditions, combined with mature risk management systems, to truly unlock its potential.