How to Day Trade with the Know Sure Thing Indicator
Overview of the KST Indicator
The Know Sure Thing (KST) indicator is a two-line indicator similar to the MACD developed by Martin Pring. The oscillator swings above and below zero, and accordingly gives trade signals to traders.
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Divergence with price and KST also provides signals to traders.
If the Know Sure Thing crosses above the zero line then a buy signal is triggered. If the KST holds above the zero line for an extended period of time, an uptrend is confirmed.
Conversely, if the KST crosses below the zero line, then a sell signal is triggered. In addition, if the KST remains below the zero line, then the downtrend is confirmed. .
Now, let’s see how the Know Sure Thing indicator is calculated.
The Know Sure Thing indicator uses four different time frames to give the overall momentum instead of using only one time frame. Below are the four different time frame calculations:
Rate of Change Moving Average 1= 10-Period Simple Moving Average of 10-Period Rate-of-Change
Rate of Change Moving Average 2 = 10-Period Simple Moving Average of 15-Period Rate-of-Change
Rate of Change Moving Average 3 = 10-Period Simple Moving Average of 20-Period Rate-of-Change
Rate of Change Moving Average 4 = 15-Period Simple Moving Average of 30-Period Rate-of-Change
Based on the above formulas, the Know Sure Thing indicator line is calculated as per the below calculation
Know Sure Thing Indicator Line = (Rate of Change Moving Average 1 x 1) + (Rate of Change Moving Average 2 x 2) + (Rate of Change Moving Average 3 x 3) + (Rate of Change Moving Average 4 x 4)
Now the final Know Sure Thing Indicator Signal Line is calculated based on the 9-period Simple Moving Average of the Know Sure Thing Indicator.
(Know Sure Thing Indicator Signal Line = 9-period Simple Moving Average of Know Sure Thing Indicator)
Let’s have a look at an example on how the KST indicator is plotted.
The below image is the 30-minute chart of Alcoa from June 1st to June 23rd, 2016.
Now if you take a look of default KST indicator line, there are 9 periods that have been selected-
KST (10, 15, 20, 30, 10, 10, 10, 15, 9).
Traders can choose their periods based on their preference and trading style.
In the above image, we have highlighted the bullish trends from KST with a blue line. We have identified the first cross over, where Alcoa has remained above zero. Accordingly, we enter Alcoa at $9.22 and the stock rallied.
The bullish trend holds until the price reaches $9.80 and the downtrend was confirmed as the KST began trending downwards and ultimately fell below zero.
Again, we get a buy signal on June 15th, 2016, and accordingly KST has been rising above zero, confirming a bullish trend.
Divergence with the KST Indicator
Like other technical indicators, the KST also has divergences.
If the prices are falling while the KST indicator is rising, there is a bullish KST divergence. This indicates that the stock would recover if the KST indicator has confirmed a bullish trend. The below example would show you how the bullish KST divergence works.
This is the 5-minute chart of Citigroup from June 13th to June 15th, 2016. The trend we have indicated in the blue line is the place where the KST indicator is rising post a crossover. However, the price was falling during the same period, showing divergence.
Similarly, if the stock price is rising while the KST indicator is falling there is a bearish KST divergence.
The stock could fall after the KST indicator has confirmed a bearish trend by falling below zero. The below example shows the bearish KST divergence in action.
Below is a 2-minute Alibaba chart from June 21st-June 22nd, 2016. We have highlighted the divergence in orange.
The Alibaba stock was surging while the KST indicator was falling. Ultimately, you can see that the stock breaks down, thus confirming the bearish trend.
Trading Morning Breakouts with the KST
The KST indicator can be an effective tool for intraday traders.
In the below image, we have selected an intraday 2-minute chart of Alibaba from June 22nd. We have identified several crossover signals from the KST indicator. For instance, the KST indicator is signaling a bullish trend in the morning session at around 10:15 am on June 22nd, 2016.
A long entry could have been initiated at $78.50 and held until a crossover to the downside at $79.
This would have resulted in a 50 cent per share profit in less than two hours.
Trading Double Bottoms with the KST
Now, let’s combine the Know Sure Thing indicator with a double bottom on the chart.
Let’s take a look at Ford’s 5-minute chart for June 22nd and June 23rd, 2016.
We have identified the first bottom in the morning session on June 22nd at nearly 9:35 am. We have confirmed the second double bottom at around 1:25 pm. Consequently, after around half an hour, a bullish crossover develops in the KST confirming the bullish trend. Accordingly. we take a long position at $13.18. On June 23rd, Ford made a gap up and crossed $13.40. We get a bearish crossover from KST and hence we sold our position at around $13.36 position.
In this example, you would have held a position overnight. I personally do not hold positions; however, you will need to determine if this makes sense for your trading style.
Day Trading Ranges with the KST
Now, let’s have a look at an Apple chart on a 1-minute interval. Next we evaluate how many trading opportunities we have using the KST indicator during the entire day. We have highlighted buy signals in orange and sell signals in orange.
For instance, in the below chart you could see that we received a buy signal from the KST indicator on June 23rd at $95.50. Then we receive a sell signal from the KST indicator after over half an hour and accordingly we cover our position with a slight gain at $95.80.
These range bound trading signals work best during mid-day trading as the volatility dries up in the market.
Remember, if a stock is trending sharply, there is no indicator that will keep the stock from going in its desired direction.
How to Avoid False Signals with the KST
Lastly, we are going to cover how to avoid false signals with the KST.
KST gives false signals like any other indicator and hence day traders should use another method for validating trade signals.
Combining the KST with the volume indicator is an effective way of entering into strong trends.
In the below image, we have selected a 2-minute chart of Apple and observed the KST indicator and volume changes on June 23rd, 2016.
We received a buy signal from the KST indicator in the morning session at around 9:58 am. This trend was confirmed with the volume increase along with price expansion. Hence, we open a position at $95.50.
We later receive a sell signal at $95.77 from the KST in less than an hour. We exit the position and book the small gain.
We then enter the waiting game of letting additional trade signals develop.
Near the end of the June 23rd trading day, Apple stock got a strong buy from the KST indicator as well as supported by huge increase in volume. Accordingly, we opened a long position at $95.45 and the stock made a clear rally higher and closed at the end of the day near $96.05. This resulted in a gain of $0.87 per share during the day.
- The Know Sure Thing (KST) Indicator is a two-line indicator similar to the MACD.
- If the Know Sure Thing crosses above the zero line or makes a crossover of its signal line than it is a buy signal.
- If the KST crosses below the zero line or makes a crossover below the signal line, than it is a sell signal.
- The KST Indicator signal Line is calculated based on the 9-period Simple Moving Average of the KST Indicator.
- The default setting of the KST indicator is KST (10, 15, 20, 30, 10, 10, 10, 15, 9).
- If the prices are falling and the KST indicator is rising, than it is a bullish KST divergence.
- If the stock price is rising while the KST indicator is falling then it is a bearish KST divergence.
- The KST indicator can be an effective tool for intraday traders.
- The KST is prone to giving false signals like any other indicators while the combination with other indicators could decrease this risk to traders.
- The KST along with Volume indicator is one of the effective way of knowing and validating the trends.