Recently, I have been looking at discussions among traders and found that many people still have some misunderstandings about the KDJ indicator. I will organize my understanding here in hopes of helping those who want to deepen their knowledge of this tool.

The KDJ indicator is actually called the stochastic indicator. It helps investors identify trends and entry points. The chart shows three lines, namely the K value, D value, and J value. The K line is the fast line, the D line is the slow line, and the J line is used to observe the deviation between the K and D lines. Simply put, the K and D lines reflect overbought and oversold conditions. When the K line breaks through the D line, it forms a trading signal.

Regarding calculation, you don't need to do it manually. Trading platforms will calculate it automatically; we just need to set the parameters, usually (9,3,3). But understanding the underlying logic is still helpful. The basic idea is to first calculate the raw stochastic value, then derive the K, D, and J values through a smoothed moving average method.

In practice, there are several common ways to use the KDJ indicator. First is overbought and oversold judgment. We can draw two lines at the 80 and 20 levels. When the K and D lines rise above 80, it indicates overbought; when they fall below 20, it indicates oversold. The J line can also be used for judgment: a J value greater than 100 indicates overbought, while less than 10 indicates oversold.

Second are the golden cross and death cross signals. The golden cross is a buy signal, and the death cross is a sell signal. More detailed classifications include the low-level golden cross and high-level death cross. A low-level golden cross occurs when both K and D are below 20, and the K line crosses above the D line, suggesting a bullish reversal and a good buy point. A high-level death cross occurs when both are above 80, and the K line crosses below the D line, indicating a bearish reversal and a signal to sell.

There are also divergence patterns. Top divergence occurs when the stock price hits a new high but the KDJ indicator weakens, which is a sell signal. Bottom divergence occurs when the stock price hits a new low but the KDJ indicator strengthens, signaling a buy. I remember a notable case in 2016 with the Hong Kong Hang Seng Index. During that period, the price made lower lows, but the KDJ indicator made higher lows, forming a clear bottom divergence. Later, the Hang Seng Index indeed reversed and rose, and investors who identified this pattern captured a good move.

Besides crossovers and divergence, chart patterns are also important. Double bottoms or triple bottoms appearing below 50 indicate the price is shifting from weakness to strength. Double tops or triple tops appearing above 80 suggest a reversal downward. The more bottoms, the larger the upward potential; the more tops, the larger the downward potential.

However, the KDJ indicator also has limitations. It reacts very sensitively to the market and can sometimes give signals too early. In extremely strong or weak markets, it may become less effective. Also, since it is based on past data, it has a lagging effect. Most importantly, the KDJ should not be used alone; it needs to be combined with other indicators and analysis methods to make more reliable decisions.

My advice is to treat the KDJ as an auxiliary tool, used together with candlestick charts and other technical indicators. In actual trading, no indicator is perfect. The key is to continuously accumulate experience through practice, fully leverage the advantages of the KDJ, and also avoid its shortcomings. Only then can you navigate the market more steadily.