Recently, I’ve been reviewing discussions among traders and found that many people use the KDJ indicator to determine buy and sell points. This tool is indeed known as one of the “Three Great Treasures” for retail investors, but truly using it correctly is rare. Today, I’d like to share my understanding of the KDJ lines, in the hope that it will help everyone avoid detours.

The KDJ indicator is actually a stochastic indicator. It helps us identify trends and optimal entry points. On the chart, there are three lines: the K value (fast line), the D value (slow line), and the J value (direction-sensitive line). The K and D lines can reveal overbought or oversold conditions, while the J line is used to show the deviation between the K and D lines. When these lines converge, it often signals a new trading opportunity.

In simple terms: when the K line breaks upward above the D line, it usually indicates the market is rising—so you may consider buying. Conversely, when the K line breaks downward below the D line, it indicates a downtrend—so you should consider selling. But this is only the basic logic; in real trading, there are more details to pay attention to.

The calculation of the KDJ indicator involves the proportional relationship among the highest price, the lowest price, and the closing price. These data are converted into an RSV value, and then the K, D, and J values are calculated using a smoothing method based on moving averages. However, in actual trading, most trading platforms have already done these calculations for us—we only need to set the parameters. Typically, (9,3,3) is enough.

I think the most practical use of the KDJ lines is to identify overbought and oversold conditions. We can draw two horizontal lines at 80 and 20. When the K and D lines rise above 80, it suggests the stock may be in an overbought state; if they fall below 20, it indicates it’s oversold. The J line can also help us judge: a J value greater than 100 indicates overbought, while a J value less than 10 indicates oversold.

As for buy and sell signals, the KDJ indicator mainly has four ways to make judgments. The golden cross is the most classic buy signal—when the K and J lines simultaneously break upward above the D line, especially when a low-level golden cross forms below 20, it indicates bearish momentum is weakening and the bulls are about to launch an attack. The death cross is the sell signal—when the K and J lines both break downward below the D line from above 80, it indicates bullish power is about to run out.

In addition, top divergence and bottom divergence are also important. Top divergence means the stock price is making higher highs wave after wave, but the KDJ indicator is making lower highs wave after wave—this is usually a sell signal. Bottom divergence is the opposite: the stock price makes lower lows wave after wave, but the KDJ indicator makes higher lows wave after wave—this is a buy signal.

The KDJ indicator can also help us identify double tops and double bottoms. When the KDJ lines are below 50, if a W-bottom or triple-bottom reversal pattern appears, it’s an opportunity to buy the dip. Conversely, if an M-top or triple-top appears above 80, that’s a sell signal.

The case that left the deepest impression on me was the 2016 Hang Seng Index in Hong Kong. During the February downturn, the price kept making lower lows, but the KDJ indicator kept making higher lows—a typical bottom divergence pattern. Many people felt hopeless, but knowledgeable investors started accumulating positions here. Later, on February 19, the Hang Seng Index surged 5.27%, and when a low-level golden cross appeared on February 26, there was again an opportunity to add positions. Then on April 29, a high-level death cross appeared, and smart investors cleared out and exited at that point. On December 30, a double-bottom pattern appeared again—another good entry point. This case fully demonstrates the value of the KDJ indicator in real-world trading.

That said, I also need to make it clear: the KDJ indicator is not perfect. Sometimes it gives signals too early, causing us to trade frequently. Other times, the signals lag—when the market changes quickly, it may not respond in time. Moreover, in sideways or ranging markets, the KDJ indicator tends to produce false signals and can mislead traders. So the most important thing is: never treat the KDJ indicator as the only basis for decision-making. Use it together with other technical indicators and charts to be more reliable.

My advice is to fully leverage the strengths of the KDJ indicator in practice, and use experience to offset its shortcomings. Combine it with candlestick charts, the KDJ lines, and other indicators to trade—this is how you can effectively reduce investment risk. For friends interested in trading, you can practice first with a demo account on platforms like Gate, so you become familiar with the real trading process—this will help you get started much faster.