In the early 90s, Martin Pring, developed an indicator called the KST or 'know sure thing.' The KST is a technical analysis tool that is used to give the investors signals and to detect trends in the market and to remove the short term movements while detecting these trends.
There can be a lot of noise in the market, with price fluctuations and so on, and in the short term, that will cause a lot of buy/sell signals that are really not good signals to follow due to their rapid fluctuations. The KST removes these problematic short term signals and smoothes everything out for the investor to be able to better read the trends.
The KST indicator is made up of 4 periods that are all combined into one single oscillator. The KST indicator is read the same way other oscillators are and are most commonly used to identify bullish and bearish movements in the market and give the appropriate signals for each.
When using KST within a trading system, make sure to do the following:
• When KST is in a trend pattern and KST crosses above its signal line, traders can buy at the next day's opening price.
• When KST is trending and KST crosses below its signal line go short the next day at the opening price.
• When KST crosses below its signal line then Sell at the next day's opening price
• When KST crosses above its signal line, then cover at the next day's opening price
KST signals are not reliable when the indicator is flat or close to the zero line. When this is occurring, it means the market is ranging, and the trader shouldn't base their moves on the signals given. Wait until the market isn't ranging before giving the signals weight.
Set up for the KST is relatively easy and is done on 9, 12, 18, and 24 month ROC. The 9, 12, and 18 month ROC has been smoothed by a 6 month simple moving average. The 24 month ROC and the signal line both use a 9 month simple moving average.
The following is a standard formula for using the KST indicator.
• Start off by calculating the rate of change indicator for 9, 12, 18 and 24 months.
• Using a 6 month SMA (simple moving average) smooth the9, 12 and 18 month ROC.
• Next, using a 9 month SMA, smooth the 24 month ROC.
• Using their time period as a gauge, weight all 4 of the smoothed out ROCs. The way this is done is by taking the sum of all 4 of the periods, which is 63, and each period is multiplied by the correct value. For example, the 9 month ROC will be multiplied by 9/63 and the 12 month ROC will be multiplied by 12/63 and so on.
• To figure out the KST indicator, add the weighted values
• You can use the 9 month simple moving average of KST, you can figure the signal line
The KST indicator is not foolproof and it has its own problems in terms of whipsawing too much when the market is on an uptrend. The key to doing well with indicators is learning how they work and what information they give. Then learning how to read the information the indicators give you and applying them to your trading strategies. The more you study the indicators, the more experienced and comfortable you will become using them, however always be aware that there are no failsafe methods and if care is not taken when calculating the information gathered, traders can make costly missteps in their trades.
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