Recently, many beginners have asked me what KDJ is and why this indicator is called one of the "Three Treasures of Retail Investors." To be honest, the KDJ indicator is indeed one of the most commonly used tools in my technical analysis—simple and easy to use, but quite powerful.

First, the conclusion: What is KDJ? It is the stochastic indicator, which can help you quickly identify market turning points and optimal entry points. The chart shows three lines: the K line (fast line), the D line (slow line), and the J line (direction-sensitive line). The K and D lines mainly look at overbought and oversold conditions, while the J line is used to judge the degree of deviation between K and D. When these three lines come together, it often signals a new trading opportunity.

My understanding is this: The K line measures the position of the closing price within a certain period's price range, the D line is a smoothed version of the K line used to filter out some noise. The J line measures how much the K and D lines diverge. Simply put, when the K line breaks above the D line, it usually indicates an upward trend and a potential buy signal; when the K line breaks below the D line, it signals a decline and suggests selling.

As for how to use it, I’ll share the basic logic first. The KDJ indicator calculates the ratio of the highest, lowest, and closing prices within a certain period to produce an "uncooked stochastic value," then uses a smoothed moving average method to derive the K, D, and J values. I won’t go into the specific formulas here; the key is that the parameters are usually set to (9,3,3), with higher values making the indicator less sensitive to price fluctuations.

In practical trading, I most often judge using a few methods. First is overbought and oversold conditions. I draw two horizontal lines at 80 and 20. When the K and D lines rise above 80, it indicates the stock is in an overbought state; dropping below 20 indicates oversold. Sometimes I also look at the J line; a J value above 100 is overbought, below 10 is oversold.

More importantly, golden cross and death cross signals. A golden cross occurs when the K and J lines are both below 20, and the K line crosses above the D line—what I call a "low-level golden cross." This suggests the bearish momentum is weakening, and the bulls are about to rebound, signaling a buy. I remember buying when this signal appeared, and the market indeed rose significantly afterward.

A death cross is the opposite. When the K and J lines are above 80, and the K line crosses below the D line—called a "high-level death cross"—it indicates the bullish force has been exhausted, and the bears are about to take over, signaling a sell. I usually close positions at this point to lock in profits.

Another important method I pay attention to is divergence. Top divergence occurs when the stock price makes higher peaks, but the KDJ indicator makes lower peaks, usually indicating the upward momentum is ending—sell signal. Bottom divergence is the opposite: the stock price makes lower lows, but the KDJ shows higher lows, suggesting the decline is about to end—buy signal.

Besides these, I also observe the patterns formed by the KDJ. For example, a double bottom (W shape) appearing below 50 indicates the price is shifting from weakness to strength, a good buy signal. A double top (M shape) above 80 signals a shift from strength to weakness, suggesting it’s time to sell. The more bottoms, the larger the potential rally; the more tops, the larger the potential decline.

The most impressive example I remember is the Hong Kong Hang Seng Index in 2016. In early February, the index was falling continuously, and many people were pessimistic. But I noticed an interesting phenomenon: although the price was making lower lows, the KDJ indicator was making higher lows—a clear bottom divergence. While others were panicking, I saw an opportunity to build positions.

On February 19, the Hang Seng Index opened high and closed high, with a large bullish candle gaining 965 points, a 5.27% increase. By February 26, a low-level golden cross appeared below 20, and I didn’t hesitate to add to my positions. The next day, the index rose another 4.20%. Later, on April 29, a high-level death cross appeared, and I exited to lock in profits. On December 30, a double bottom pattern emerged, and I re-entered, marking the start of a bull market.

However, I must also say that the KDJ indicator is not perfect. Sometimes it reacts too quickly, giving early buy or sell signals, especially in very strong or very weak markets, leading to false signals. Also, since it is based on historical prices, it has some lag, which can be problematic during rapid market changes. Most importantly, don’t rely solely on KDJ; it should be combined with other technical indicators and chart patterns to improve accuracy.

So my advice is, rather than obsessing over what KDJ is theoretically, it’s better to gain practical experience. Use its strengths in real trading, and learn to mitigate its weaknesses through experience. Only then can you truly master this tool. Remember, there’s no perfect technical indicator in the market. Smart traders always use multiple indicators together to effectively reduce risk and seize genuine trading opportunities.