Recently, someone asked me how to use the KD indicator, and I realized that many traders actually don't understand the underlying principle of this indicator; they just look at the crossover of the K-line and D-line for buy and sell signals. In fact, to truly master the KD indicator, you need to first understand how it is calculated.

Let's start with the basics: the KD indicator consists of three elements: RSV, K value, and D value. Among them, RSV is the raw stochastic value, which determines whether the current price is at a high point or a low point within a certain period in the past. The formula is (today's closing price – lowest price in the past n days) divided by (highest price in the past n days – lowest price in the past n days), multiplied by 100. The default n=9, so if today's closing price is the highest in the past 9 days, RSV is 100; conversely, if it is the lowest, RSV is 0.

Next is the K value, which reacts faster and is also called the fast line. It smooths the RSV value and yesterday's K value through a weighted average, retaining RSV's sensitivity while effectively filtering out noise. The calculation is (yesterday's K value × 2/3) + (today's RSV × 1/3). Then, the D value is smoothed from the K value again, with the formula (yesterday's D value × 2/3) + (today's K value × 1/3). This line reacts the slowest and is the most stable, so it is called the slow line.

Some trading platforms display an additional line when showing the KD, usually in purple or yellow—that is the J value. The formula is 3×K minus 2×D. The J value amplifies the divergence between K and D, serving as an extreme signal for KD. A J value greater than 100 indicates extreme overbought conditions, while less than 100 indicates extreme oversold conditions. So, the KDJ indicator is essentially KD plus a J line, with the same core but different presentation. However, honestly, the J value reacts too violently, with lots of noise and false signals. In most cases, just using the KD indicator is sufficient.

Now, why are the default parameters 9, 3, 3? These numbers are not arbitrary; they strike a balance between sensitivity and accuracy. The 9 represents the period of the past 9 candles used for calculation. In traditional finance, 9 days roughly cover two weeks of trading days. This length can capture short-term price fluctuations without being too slow due to a long period. The two 3s represent the smoothing of K and D values: the first 3 is a 3-day moving average of RSV to filter out daily spikes; the second 3 smooths the K value again over 3 days to get D, effectively reducing noise.

The reason why 9, 3, 3 became mainstream is twofold: first, whether in stock or forex markets, this set of parameters provides the most effective prediction in volatile markets, helping to identify trends and generate entry signals through golden and death crosses. Second, most traders use this set of parameters when opening the KD indicator, forming a collective consensus. When everyone looks at the same parameters, the support and resistance signals tend to be more effective.

However, KD parameters can be adjusted. If you are doing short-term day trading, you can change it to 5, 3, 3, which will generate crossover signals more frequently, but you need to filter out noise with other technical analysis tools. If you prefer steady swing trading, you can extend the period to 18, changing parameters to 18, 3, 3. The K and D curves will be smoother, and crossovers will only occur during major trend reversals.

Different timeframes also require parameter adjustments. The 5-minute and 15-minute lines are more susceptible to noise, so it’s recommended to use 14, 3, 3 to filter signals; hourly and daily charts are best with the default 9, 3, 3 for balance; weekly and monthly charts also use 9, 3, 3, with fewer signals but greater significance, suitable for long-term positioning.

There are some common questions to clarify. More precise parameters do not necessarily mean higher accuracy; adjusting parameters is to fit your trading strategy, not to predict the future. If you set parameters too short, like 3, 2, 2, you'll see countless crossovers, leading to overtrading. For most investors, the default 9, 3, 3 is sufficient unless there is a clear reason to change. The traditional overbought and oversold thresholds are KD over 80 for overbought and below 20 for oversold, but these should be slightly adjusted depending on the market. Lastly, not everyone needs to use different parameters; using non-mainstream settings may lose the advantage of collective consensus.

Ultimately, understanding the calculation logic and the significance of parameters behind the KD indicator can help you find your own trading strategy in choppy markets. Especially since the widely used 9, 3, 3 not only fits most markets but also benefits from group consensus, making support and resistance signals more precise. That’s why this set of parameters has remained popular over time.