## Trader Must Know: How to Accurately Capture Buy and Sell Points with the KDJ Indicator

In the toolbox of technical analysis, there is an indicator widely used for its simplicity and efficiency — **KDJ Indicator**. Many traders consider it an essential tool because it helps you make decisions at critical moments. But the problem is, many people know the name of the KDJ indicator but don't truly understand how to use it effectively.

## Core Principles of the KDJ Indicator

**The KDJ indicator is essentially a stochastic oscillator**, used to measure the relative position of prices within a specific period. It consists of three lines: the fast line K, the slow line D, and the sensitive line J.

Simply put, the K line reflects the current price's relative position between the highest and lowest prices over the period. The D line is a smoothed version of K, used to filter out market noise. The J line shows the deviation between K and D — the greater the deviation, the clearer the reversal signal.

**The combined action of these three lines forms the basis for judging overbought and oversold conditions and predicting trend reversals.**

## How to Set the Best Parameters for the KDJ Indicator

Many ask: What are the optimal parameters for the KDJ indicator? The answer is: **The standard parameters are (9,3,3)**, but this is not absolute.

The first number in the parameters (9) represents the statistical period, which determines the sensitivity of the indicator. The shorter the period, the faster KDJ responds to price fluctuations, but it may generate false signals; the longer the period, the more stable the signals, but the response is sluggish. For short-term traders, consider adjusting the period to 5-7; for medium-term traders, 9-14 is more appropriate; long-term investors can use 25 or above.

**The key is to adjust the parameters according to your trading time frame**, rather than blindly applying standard settings.

## Understanding KDJ: Overbought and Oversold Zones

On the chart, two horizontal lines are usually drawn at 80 and 20. These lines divide the chart into three zones:

When both K and D values rise above 80, the market enters an overbought zone — prices have risen excessively and may face a pullback. Conversely, when they fall below 20, the market enters an oversold zone — prices have fallen too much and may rebound soon.

**But here’s a common misconception: overbought does not mean you should sell immediately, and oversold does not mean you should buy immediately.** Overbought conditions can persist for days, and prices can continue to fall in oversold states. The key is to confirm the subsequent trend.

## Golden Cross and Death Cross: The Most Practical Trading Signals

**The Golden Cross** occurs when the K line crosses above the D line, especially when both are below 20, forming a strong buy signal. This indicates that selling pressure has exhausted, and buyers are about to dominate the market.

**The Death Cross** occurs when the K line crosses below the D line, especially when both are above 80, signaling a typical sell signal. The bullish momentum is waning, and bearish forces are gathering.

In an upward or downward trend, you will usually see multiple golden and death crosses. Learning to identify them is key to understanding the core use of the KDJ indicator.

## Divergence: Market Reversal Warnings

**Top Divergence**: The price keeps making new highs, but the KDJ indicator is trending downward. This suggests that although the price is rising, the upward momentum is weakening, and a decline is imminent. This is a sell signal.

**Bottom Divergence**: The price keeps making new lows, but the KDJ indicator is rising. This indicates that despite the falling price, the downward momentum is weakening, and a rebound is about to start. This is a buy signal.

Divergence often precedes price reversals and is highly valued by experienced traders.

## Practical Case: Hang Seng Index 2016

In early 2016, the Hang Seng Index was in a downturn. But attentive traders noticed something? **The price kept making lower lows, while the KDJ indicator kept making higher lows — a classic bottom divergence.** This was the entry point.

In mid-February, the Hang Seng Index suddenly surged nearly 1,000 points with a large bullish candle, rising over 5%. Later, a golden cross appeared at a low point, signaling another opportunity to add positions.

By April, a death cross at a high point appeared, and seasoned traders decisively closed their positions. Towards the end of the year, a double bottom pattern emerged, presenting another entry opportunity. Throughout this process, the KDJ indicator repeatedly indicated key turning points with precision.

## Limitations of the KDJ Indicator

However, to be honest, **the KDJ indicator is not perfect**:

- In extremely strong or weak markets, it can give early signals, leading to false buy or sell signals.
- Its signals are lagging, based on past price data, not real-time predictions.
- During sideways consolidation, it can generate false signals, misleading traders.
- It should not be your sole decision-making tool; it must be used in conjunction with other indicators.

## How to Use the KDJ Indicator Correctly

**First, choose parameters that suit your trading style**. Adjust the KDJ parameters based on your trading cycle rather than blindly using standard settings.

**Second, combine with other indicators**. Use KDJ alongside moving averages, MACD, volume, etc., to improve the reliability of signals.

**Third, pay attention to background trends and divergence**. Don’t just look at crossovers; divergence phenomena often better predict reversals.

**Fourth, practice in real trading**. Paper trading is not enough; use demo accounts to practice and truly master the use of the KDJ indicator.

There is no perfect indicator in technical analysis—only traders who keep evolving. The KDJ indicator, as a classic tool, has proven its value. The key is how you apply it flexibly in practice to avoid risks and seize opportunities.