Master the Bias Indicator (BIAS) to accurately grasp the timing of buying and selling stocks

Behind the operation of the stock market, investors’ psychological expectations play a crucial role. The Bias Indicator (BIAS) is an important technical tool used to quantify these expectations. Understanding how to utilize this indicator will directly impact your trading success rate.

What is the Bias Indicator (BIAS)—A Measure of Price Deviations

The essence of BIAS lies in describing the “distance between the current stock price and its moving average,” expressed as a percentage.

In simple terms, it helps investors identify:

• When prices deviate far from the moving average, a reversion is more likely
• When prices are close to the trend line, the trend may continue

Based on the position of the stock price relative to the moving average, the bias can be divided into two categories: Positive Bias (price above the average) and Negative Bias (price below the average).

A relatable everyday analogy

Imagine a year of bumper harvests, with rice prices soaring to historic highs. Farmers believe this is the peak of the year and worry buyers will stop purchasing, leading them to rush to sell. This phenomenon reflects market psychology—when prices rise too much, participants expect a correction and sell; conversely, when prices fall, they anticipate a rebound.

The Calculation Logic of the Bias Indicator Setting

Calculation formula:
N-day Bias = ((Closing Price on Day N - N-day Moving Average Price)) ÷ N-day Moving Average Price × 100%

First, you need to calculate the moving average, which is the sum of prices over a specific period divided by that period. Since the moving average has a lag, the derived bias indicator also exhibits a time delay.

How to Properly Set Bias Indicator Parameters

Step 1: Determine the moving average period

Choosing the appropriate period is fundamental for setting the bias indicator:

• Short-term observation: 5-day, 6-day, 10-day, 12-day moving averages
• Medium-term observation: 20-day, 60-day moving averages
• Long-term planning: 120-day, 240-day moving averages

Step 2: Select the N-day parameter

Common parameters for the bias indicator are 6-day, 12-day, 24-day. Investors should choose based on their strategy:

• Shorter periods: Make the indicator more responsive, suitable for highly volatile stocks
• Longer periods: Smoother curves, reduce false signals

Factors to consider when choosing parameters:

• Liquidity of the target stock
• Overall market trend (bullish or bearish environment)
• Personal trading cycle preferences

Using Bias (BIAS) to Find Buy and Sell Points

Set thresholds for overbought and oversold conditions

When trading with the bias indicator, preset positive and negative threshold values are necessary. For example, a 5-day bias might be set at ±2% to ±3%, but should be adjusted based on historical performance. In highly volatile markets, thresholds may be frequently touched; in such cases, combine with other signals for comprehensive judgment.

Specific trading signals

• Bias above positive threshold → Overbought, selling pressure may increase, consider reducing holdings
• Bias below negative threshold → Oversold, rebound momentum may strengthen, consider adding positions

Multiple moving averages confirmation

Combining bias signals from different periods (e.g., 5-day and 20-day) allows simultaneous observation of short-term and medium-term trends, improving accuracy.

The warning role of divergence phenomena

This is a key technique:

• If the stock price hits a new high but the bias does not, beware of a top formation
• If the stock hits a new low but the bias does not, watch for bottom opportunities

Limitations of the Bias Indicator

Limitation 1: Limited effectiveness on low-volatility stocks

When stocks fluctuate minimally over the long term or lack volatility, the guidance provided by bias diminishes significantly.

Limitation 2: Lagging risk

Since bias relies on average calculations, it has limited ability to identify quick reversals, so it should not be used as the sole basis for selling decisions.

Limitation 3: Market capitalization differences

Large-cap stocks tend to be more stable, making bias judgments more accurate; small-cap stocks are more volatile, and relying solely on bias may be ineffective.

Practical Application Key Recommendations

Combine multiple technical indicators

Bias should not be used in isolation. Combining it with KD stochastic indicator, Bollinger Bands, etc., can significantly improve success rates. Bias with KD suits rebound trades; bias with Bollinger Bands works best during oversold rebounds.

Adjust parameters flexibly

Too short a period may generate noise; too long may respond too slowly. Continuous fine-tuning based on real trading performance is necessary.

Differentiate stock quality

High-quality stocks tend to rebound quickly during declines (investors fear missing out), while problematic stocks may remain unpurchased for longer. The same indicator can perform very differently across different stocks.

The Bias Indicator (BIAS) is a simple yet intuitive analytical tool. Mastering its setting principles will greatly enhance your trading decision quality. Meanwhile, there are many other technical indicators in stock analysis worth exploring and practicing.