Recently, some friends asked me how to use the KDJ indicator, so I decided to organize some of my insights. Honestly, this indicator is indeed one of the most practical tools in retail trading, but only if you truly understand the logic behind it.

Let's start with the basics. The KDJ indicator has three lines: the K line (fast line), the D line (slow line), and the J line (direction line). The K and D lines mainly look at overbought and oversold conditions, while the J line reflects the divergence between K and D. In simple terms, it calculates the relationship between the highest price, lowest price, and closing price over a period to judge the strength of the stock. When the K line breaks above the D line, it usually indicates an upward trend; conversely, it signals a downward trend.

Regarding the best parameter settings for the KDJ indicator, most people use (9,3,3). This combination is more sensitive to short-term fluctuations. The larger the parameters, the slower the response to price changes; the smaller the parameters, the more frequent the signals. When I trade, I adjust based on the cycle—using 9 days for short-term trading, and perhaps 14 or 21 days for medium-term.

In practical trading, there are several common methods of judgment. First is the overbought and oversold zone assessment: above 80 is overbought, below 20 is oversold. When the K and D lines enter above 80, caution is advised; entering below 20 might actually be a buying opportunity.

Next are the golden cross and death cross. The golden cross occurs when the K line, below 20, breaks upward through the D line, indicating the beginning of bullish momentum and a more reliable buy signal. The death cross is when the K line, above 80, breaks downward through the D line, suggesting a potential reversal and that it might be time to take profits.

The most impressive to me are divergence signals. When the stock price keeps making new highs but the KDJ indicator shows lower peaks at high levels, that’s a bearish divergence, often signaling an impending decline. Conversely, if the price hits new lows but the indicator forms higher lows, that’s a bullish divergence, often a good opportunity to bottom fish.

I have a deep impression of this during the 2016 Hang Seng Index rally. In February, the index kept falling, and many were pessimistic. But smart traders noticed that although the price was dropping, the KDJ indicator showed a clear bullish divergence at the bottom, which is a classic buy signal. Sure enough, on February 19, the Hang Seng Index shot up with a 5.27% bullish candle, kicking off a bullish trend. This case perfectly illustrates why the optimal use of KDJ parameters should be combined with actual market conditions.

Of course, the KDJ indicator also has obvious shortcomings. In extremely strong or weak markets, it tends to become dull and can generate many false signals. Also, since it’s based on historical data, it reacts with a delay in rapidly changing markets. Most importantly, never rely solely on it as your only trading basis; it should be combined with other technical indicators and fundamental analysis for comprehensive judgment.

My advice is to practice more on demo accounts, testing different parameter combinations to find what best suits your trading style. Also, learn to recognize divergence, double tops and bottoms, M tops, W bottoms—these patterns are often more valuable than just the indicator values alone. Trading has no absolute winning rule; the key is to accumulate experience through practice, knowing when to trust the indicator and when to be cautious of risks.