What is the principle and usage of Deviation Ratio?

Principle of Deviation RatioDeviation Ratio refers to the degree of deviation of the stock price from the average moving line, and expresses the difference between the stock price and the average moving line through the form of percentage. If the stock price is above the average, it is positive; if the stock price is below the average, it is negative. The principle is analyzed mainly from the psychological point of view of investors.

Analyzing the process: because the SMA can represent the average cost of ownership, good and bad stimulus, resulting in a sharp rise and fall in stock prices. The stock price is too far away from the average, there will always be the possibility of short-term reversal, the greater the absolute value of the deviation rate, the greater the likelihood that the stock price to the average close to the formation of the basis for buying and selling of the deviation rate is provided. From market experience, the 10-day average moving line as the base period is more effective. In the case of a decline, for example, the 10-day deviation usually begins to rally at -7% to -8%. Considering the low margin of safety at this value, a safer time to enter the market would normally be between -10% and -11%. Again, for soundness, shorts can be sold near +8% on the rise.

Use of Deviation Ratio

1. The BIAS indicator indicates the gap between the closing price and the moving average. When the positive divergence of the stock price expands to a certain limit, it means that the greater the short-term profits, the higher the possibility of profit-taking; when the negative divergence of the stock price expands to a certain limit, the higher the possibility of short-covering.

2, deviation rate can be divided into positive and negative deviation rate. If the stock price is greater than the average, it is positive deviation; stock price is less than the average, it is negative deviation. When the stock price is equal to the average, the deviation rate is zero. The greater the positive deviation, the greater the short-term overbought, the more likely the top; the greater the negative deviation, the greater the short-term oversold, the more likely the bottom.

3, the stock price and the BIAS indicator to what extent the percentage is considered to be the time to buy or sell, different markets, different periods, different cycles that different moving averages algorithms derived from the BIAS value is different. In the long market, there will be a lot of high prices, too early to sell will miss a period of the market, can be sold in the previous high price of the positive deviation point; in the short market, will also make the negative deviation increase, can be bought in the previous low price of the negative deviation point.

4, BIAS indicator defect is too frequent buy and sell signals, so with stochastic indicators (KDJ), Bollinger Bands (BOLL) with the use of indicators.