Recently, I was chatting with some trading friends and found that many people’s understanding of the KDJ indicator is still at a superficial level, especially when it comes to parameter settings. I’d like to share my real understanding of this indicator.

The KDJ indicator is actually a stochastic indicator. It can help us quickly find trend reversal points. On the chart, there are three lines: the K value is the fast line, the D value is the slow line, and the J value is the directional line. The K and D lines tell us about overbought and oversold conditions, while the J line is used to observe the degree of deviation between the K and D lines. When these lines cross, it usually means a new trading opportunity has appeared.

As for practical usage, the KDJ indicator’s parameter settings are typically set by default to (9,3,3), which is sufficient for most traders. However, the higher the values, the more sluggish the indicator becomes in responding to price fluctuations. I sometimes adjust the parameters according to my trading timeframe—for short-term trading, I may use more sensitive settings.

How should you read this indicator? The most direct method is to draw two horizontal lines at 80 and 20. If the K and D lines rise above 80, it indicates overbought; if they drop below 20, it indicates oversold. The J line can also be used for judgment: above 100 means overbought, and below 10 means oversold.

For buy and sell signals, I think the most useful ones are four scenarios. The golden cross is when both the K and J lines cross above the D line at the same time—this is a buy signal. The death cross is the opposite and is a sell signal. There are also top divergence and bottom divergence. When the stock price makes one peak higher than another but the KDJ instead declines, you should sell; when the stock price makes one peak lower than another but the KDJ instead rises, you should buy.

The case that left the deepest impression on me was the 2016 Hang Seng Index rally in Hong Kong. On February 12, the index fell badly, but savvy traders found that while the price kept making lower lows, the KDJ indicator was rising wave after wave, clearly forming a bottom divergence pattern. A week later, the Hang Seng Index surged straight up with a 965-point big bullish candle, up 5.27%. Those who opened positions when the bottom divergence appeared made a fortune. Later, on February 26, a golden cross formed at the low—another great opportunity to add positions. Then in April, a death cross pattern appeared at the high, and promptly closing out helped preserve the profits. This case perfectly illustrates the power of KDJ parameter settings and real-world application.

That said, I have to be honest: the KDJ indicator also has many pitfalls. It’s too sensitive—it often gives signals too early. Especially in extremely strong or extremely weak markets, it can become dulled. Its signals also have lag; in a market that changes quickly, it can’t react in time. Most importantly, it is prone to false signals, particularly when the market is ranging and consolidating, where its performance can be especially unstable.

So my advice is: never treat the KDJ indicator as the only reference. It’s best to combine it with other technical indicators, such as candlestick charts and trading volume. In my own trading, I always use multiple indicators in conjunction, so I can reduce risk. Practice more in live trading, and over time you’ll feel the best combination of KDJ parameters and use your experience to make up for its shortcomings. There is no perfect indicator—only imperfect ways of using it.