Recently, while analyzing the market, I remembered a detail that many people tend to overlook: the true meaning of the KD indicator at extreme values. Many know that a KD value above 80 indicates overbought conditions, but their understanding of the oversold zone below KD 20 is actually not deep enough.

First, let's talk about the core logic of the KD indicator. It essentially observes the relative position of the current price within a certain period in the past. It consists of two lines, K and D. The K line is more sensitive, while the D line is smoother. Both fluctuate between 0 and 100. Higher values indicate the price is at a relatively high point, lower values indicate a relatively low point. This mechanism itself is quite intuitive.

Regarding overbought and oversold zones, many people's first reaction is that KD above 80 suggests a decline. But I found that many actually do not truly understand the meaning of the oversold zone below KD 20. When KD drops below 20, the market is indeed in an extremely cold state, but this precisely indicates that most of the selling pressure has already been exhausted. From another perspective, when such an extreme low like KD 20 appears, it often signals that a trend reversal or at least a pause is imminent, and it could even be a good entry point.

Besides zone judgment, the KD indicator also has two very practical crossover signals. When the fast line K crosses above the slow line D, it’s called a golden cross, which suggests that short-term upward momentum is starting to dominate. Especially when a golden cross occurs in the oversold zone below KD 20, its effectiveness is often particularly strong. Conversely, when K crosses below D from above, it’s called a death cross, indicating that downward momentum is taking over. This is especially true if it occurs above KD 80, increasing the probability of a decline.

Going deeper, KD divergence is one of the most advanced and useful techniques. A top divergence occurs when the price hits a new high but the KD indicator does not follow with a new high. This indicates that although the price is rising, the underlying momentum is already weakening, and it’s wise to reduce positions or take profits. Conversely, a bottom divergence occurs when the price hits a new low but the KD does not, suggesting that selling pressure has eased and a rebound may follow.

In practical trading, I find that relying on a single signal often yields mediocre results. Multiple signals need to align to improve the win rate. For example, seeing a golden cross in the oversold zone, or a bottom divergence near KD 20 combined with a golden cross, makes the signal more reliable. I also often combine the KD indicator with RSI; when both indicators simultaneously signal overbought or oversold conditions, the probability of a reversal increases significantly.

However, honestly, the KD indicator also has obvious shortcomings. In strong trending markets, KD values tend to get stuck above 80 or below 20. If you only trade based on these extreme zones, it’s easy to get caught in repeated stop-outs. In sideways consolidation, the K and D lines often cross frequently, generating many false signals. Therefore, it’s necessary to combine trend analysis. Also, the KD indicator is essentially a lagging indicator; it relies on past data, so it can reflect momentum but with limited precision.

Therefore, my suggestion is to use the KD indicator in alignment with the overall trend for the best results. In a bullish trend, a death cross on a smaller timeframe might be overwhelmed by larger buying pressure. Conversely, in a bearish trend, a golden cross can easily lead to being trapped. The KD indicator is quite sensitive and has clear zones, making it especially suitable for ranging markets. But when using it, always combine with trend analysis and other indicators to truly leverage its advantages.