Recently, while organizing my trading notes, I remembered the KDJ indicator. Honestly, calling it one of the "Three Treasures of Retail Investors" does have some truth to it. However, many people find that it doesn’t work as well as they imagined after using it for a while, mainly because they haven't truly understood its logic.

Let me first explain what the KDJ indicator is. It’s called the stochastic indicator, and on the chart, there are three lines—K is the fast line, D is the slow line, and J is the sensitivity line. The K and D lines help you identify overbought and oversold conditions, while the J line is used to observe deviations between the K and D lines. In simple terms, it calculates the relationship between the highest price, lowest price, and closing price over a certain period, then plots these for your reference.

The most common way I use the KDJ indicator is to look for golden crosses and death crosses. When both K and D are below 20, and K line crosses above D line, that’s a low-level golden cross, indicating the bulls are starting to regain strength and it’s a good buy signal. Conversely, when both are above 80, and K line crosses below D line, that’s a high-level death cross, suggesting the bears are gaining momentum and it might be time to exit.

Besides crossover patterns, divergence phenomena are also worth paying attention to. When the stock price makes higher highs but the KDJ indicator makes lower highs, it’s called a bearish divergence, usually a reversal signal. Conversely, if the price keeps falling but the KDJ indicator rises from low levels, that’s a bullish divergence, often an opportunity to catch the bottom.

Another practical method is to look for double bottoms and double tops. When the KDJ forms a W bottom or triple bottom below 50, it indicates a potential reversal upward. When it forms an M top or triple top above 80, it suggests a possible downward trend. I remember in 2016, during the Hang Seng Index rally in Hong Kong, smart traders used bottom divergence and triple bottom patterns to position themselves early, capturing a nice upward move afterward.

However, I have to be honest—KDJ isn’t all-powerful. It has some obvious shortcomings. First, it tends to become less responsive in extremely strong or weak markets, often giving early signals that lead to frequent trades, increasing transaction costs and risks. Second, it’s a lagging indicator because it’s based on past prices, so in fast-changing markets, it may react too slowly. Plus, it can generate false signals, especially in sideways or choppy markets, making it quite unstable.

Therefore, my advice is to use the KDJ indicator in conjunction with other technical tools, such as candlestick patterns, volume, or other oscillators, to improve accuracy. Relying solely on KDJ for decision-making isn’t enough. In actual trading, I pay more attention to the resonance of multiple signals—when KDJ, price patterns, and volume all point in the same direction, that’s when the signal is more reliable.

In summary, the KDJ indicator is indeed a useful tool in technical analysis, but the key is to understand its principles and limitations, and to keep practicing in real trading. There’s no perfect indicator—only traders who can adapt flexibly to different market conditions.