For starters, a divergence happens when an asset’s price moves in one direction while the indicator moves in the other. When it happens, it simply means that the overall bullish or bearish trend is losing its momentum. The Smoothed ROC is calculated by applying a moving average to the ROC values.
Developed by Martin Pring, Know Sure Thing (KST) is a momentum oscillator based on the smoothed rate-of-change for four different timeframes. Pring first described the indicator in the 1992 “Summed Rate of Change (KST)” in Stocks & Commodities magazine. In short, KST measures price momentum for four different price cycles, combining them into a single momentum oscillator. Like any other unbound momentum oscillator, chartists can use KST to look for divergences, signal line crossovers, and centerline crossovers. Although trend line signals do not occur often, Pring notes that such breaks reinforce signal line crossovers.
In the below image, we have selected a 2-minute chart of Apple from June 23rd. I do not hold positions; however, you will need to determine if this makes sense for your trading style. Now, let’s combine the Know Sure Thing indicator with a double bottom on the chart. The below image is the 30-minute chart of Alcoa from June 1st to June 23rd.
- However, the price was falling during the same period, showing divergence.
- Even though the formula for KST looks complicated, it is simply a weighted average of four different rate-of-change values that have been smoothed.
- The KST oscillator, as its title implies, is frequently employed in day trading, when turnover is extremely quick because approaches are typically opened and closed on the same day.
- For example, calculate the 10-period rate-of-change and then smooth it with a 10-period simple moving average.
- This means that the Know Sure Thing (KST) will work best when the security in question is experiencing a primary up- and downtrend based on the business cycle.
- Indeed, in most cases, the MACD and KST crossovers happen at the right time.
The chart below shows the KST applied in an Apple daily chart. Martin Pring would be the first to admit that KST is not a perfect indicator. KST does, however, have its uses – Pring encourages chartists to try different settings because one size does not fit all. Utility and consumer staples are less volatile and may require more sensitive settings. Technology stocks are more volatile and may require less sensitive settings.
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Even though KST fluctuated up and down, it never broke below zero and remained in positive territory the entire time. The bearish signal line crossovers simply indicated a slowing in upside momentum, not a trend change. A rate of change (ROC) indicator is the foundation of KST indicator. The KST indicator can be used in the same manner as many other momentum oscillators, such as the well-known relative strength index (RSI). Analysts can also seek out signal line crossovers in order to better understand its general direction, and by association, the future likelihood of a trend developing or failing.
The example below shows BroadCom (BRCM) with a large bearish divergence and a large bullish divergence. These divergences were finalized with subsequent signal line crossovers (red and green arrows). Even though the formula for KST looks complicated, it is simply a weighted average of four different rate-of-change values that have been smoothed. For example, calculate the 10-period rate-of-change and then smooth it with a 10-period simple moving average. The chart below shows the four different rate-of-change indicators with the appropriate moving averages for smoothing. The centerline and signal line indicators remain the de facto norm, even though there are numerous distinct sorts of indications that can be looked into when employing KST.
Bearish KST Signal Line Cross
KST does have upper and lower limitations, unlike a TRIX indicator, making it less useful for identifying oversold/overbought assets. To increase their chances of making a profitable transaction, traders may have also considered other types of technical analysis. The Know Sure Thing indicator’s recommended trades that are less profitable could be avoided by using these insights.
At the same time, if your platform does not have it, you could substitute it with the MACD since the two work relatively well. In a 1992 Stocks and Commodities article, Pring referred to the indicator as “Summed Rate of Change (KST),” but the KST term stuck with technical analysts. We then enter the waiting game for another trade signal to develop.
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The first rate-of-change setting carries the least weight and the fourth one carries the most weight. Note that the first four numbers represent the rate-of-change settings. The second four numbers represent the moving averages to smooth these four rate-of-change indicators. Many traders combine the KST indicator with other forms of technical analysis to maximize their odds of success. For example, traders may look at other non-momentum indicators, chart patterns, or candlestick patterns to help in their decision-making.
Then we receive a sell signal from the KST indicator after over half an hour and accordingly at $95.80. 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. In our experience, the KST is a relatively easy-to-use indicator that is also relatively accurate.