Recently, someone asked me how to use the KDJ indicator again, so I decided to organize my trading notes and share them with everyone. Honestly, this indicator is quite useful in my trading system, but many people use it incorrectly.

First, let's talk about what the KDJ indicator is. Simply put, it helps you judge the trend and entry points by analyzing the ratio relationships between the highest price, lowest price, and closing price. There are three lines on the chart: the K line is the fast line, the D line is the slow line, and the J line is used to observe the divergence between K and D. The K and D lines can tell you when the market is overbought or oversold, while the J line measures their divergence.

In my opinion, the typical parameter setting for the KDJ indicator is usually 9, 3, 3, which most trading platforms default to. If you want to adjust sensitivity, higher values make it less responsive to price fluctuations, and lower values make it more sensitive. I personally adjust it slightly based on market volatility during short-term trading, but the basic parameters remain the same.

How do I interpret it in practice? I usually draw two horizontal lines at 80 and 20. When the K and D lines are above 80, it's the overbought zone; when they drop below 20, it's the oversold zone. Of course, the J line can also help—above 100 indicates overbought, below 10 indicates oversold.

There are four most practical signals. The first is the golden cross: when the K line and J line both break above the D line upward, it's a buy signal. I've seen many traders enter positions immediately when they see a golden cross below 20, and it works pretty well. The second is the death cross: when the K line and J line both break below the D line downward, especially when above 80, it's a sell signal. At that point, I usually consider closing positions.

There are also top divergence and bottom divergence. When the stock price makes higher highs but the KDJ indicator makes lower highs, it's called top divergence, which is a sell signal. Conversely, if the price makes lower lows but the KDJ makes higher lows, it's bottom divergence, signaling a buy. I used this method to catch bottoms during the Hang Seng Index in 2016—prices kept falling, but the indicator showed bottom divergence, and later the market indeed rebounded.

Besides crossovers and divergence, there are double bottoms (W patterns) and double tops (M patterns). When the KDJ moves below 50 and forms a W bottom, it indicates a potential reversal upward. Conversely, when it forms an M top above 80, be cautious of a decline.

Honestly, the KDJ indicator also has pitfalls. It tends to become dull in extremely strong or weak markets, often giving early signals that lead to losses. Plus, it's based on past data, so it has a lag, and in fast-changing markets, it may not react quickly enough. The most critical issue is that it can generate false signals, especially during sideways consolidation, making it unreliable.

Therefore, my advice is not to rely solely on the KDJ indicator for decision-making. It should be used together with candlestick charts, volume, and other technical indicators to reduce risk. In my trading system, the KDJ is just an auxiliary tool; the real decisions are based on overall market trends and my trading plan.

By the way, if you want to learn more deeply, you can practice on platforms like Gate with a demo account, adjusting the KDJ parameters while observing the market to find the most suitable settings for yourself. There are no secret tricks in trading—it's about continuously improving your system through practice.