Recently, many people have been asking how to use the KDJ indicator, so I might as well organize my trading insights from these years. To be honest, although the KDJ indicator looks complicated, once you grasp the key points, it can indeed help you seize many opportunities.

First, let's talk about what KDJ is. It's called the stochastic indicator, and the chart has three lines—K line (fast line), D line (slow line), and J line (direction line). Among them, the K and D lines are mainly used to judge overbought and oversold conditions, while the J line measures the deviation between K and D. Many people are unclear about how to interpret the J value; actually, it's just looking at how much this line deviates from K and D lines. The larger the deviation, the stronger the reversal signal.

Here's how I usually use it: draw two horizontal lines on the chart at 80 and 20. When K and D lines rise above 80, it indicates overbought conditions, so be cautious; when they drop below 20, it indicates oversold, and a rebound might occur. If using the J line to judge, a J value greater than 100 indicates overbought, less than 10 indicates oversold. Many people ask how to read the J value more accurately; in my experience, combining the K and D lines yields the best results.

The most practical signals in actual trading are still the golden cross and death cross. When K and J lines are both below 20, and K line breaks above D line, this is a low-level golden cross, a buy signal. Conversely, when K and J lines are above 80, and K line breaks below D line, this is a high-level death cross, a sell signal. I’ve used this method to catch many short-term opportunities.

Another technique is divergence. When the stock price makes higher highs repeatedly, but the KDJ indicator makes lower highs each time, this is called a bearish divergence, a sell signal. Conversely, when the price makes lower lows repeatedly, but the KDJ makes higher lows, this is called a bullish divergence, a buy signal. This pattern often appears at reversal points and is quite reliable.

Besides crossovers and divergence, observing the shape of the KDJ is also important. When the indicator operates below 50 and forms a W bottom or a triple bottom pattern, it indicates the bottom has been reached and a reversal upward may occur. Conversely, when it’s above 80 and shows an M top or triple top, it’s a sign of a top, and you should consider exiting.

One of the most impressive cases I remember is the Hang Seng Index in 2016. In mid-February, the Hang Seng kept falling, and many were pessimistic. But I noticed that while the price made lower lows, the KDJ indicator made higher lows, a clear bullish divergence. At such times, how to interpret the J line is crucial—the height and shape of the J line often reflect the turning point better than the price. Sure enough, on February 19, the Hang Seng Index shot up with a large bullish candle of 965 points, a 5.27% increase. Afterwards, a low-level golden cross appeared below 20, and I added positions. On April 29, a high-level death cross appeared, and I exited. By the end of December, a double bottom formed, and I re-entered. In February 2018, a high-level death cross combined with a triple top pattern, so I immediately closed all positions. Throughout this process, signals from the KDJ indicator helped me precisely catch the start and end of this bull market.

However, KDJ is not perfect. Sometimes, in extremely strong or weak markets, it can become dull and give early signals, leading to losses. The signals also have a lag; in fast-changing markets, it may not keep up. Additionally, during sideways consolidation, false signals can occur easily. Therefore, my advice is never to rely solely on KDJ; it should be combined with candlestick patterns, volume, and other technical indicators.

Regarding how to interpret the J value, the most important thing is to practice in real trading. I suggest everyone repeatedly practice on demo accounts on certain trading platforms, observe all kinds of KDJ patterns, and naturally develop muscle memory. Trading doesn’t have an absolute skill; it’s about continuously improving your method through practice. KDJ is just a tool to help you judge; the key is to know when to enter and when to wait and see.