Know Sure Thing | TrendSpider Learning Center (2024)

3 mins read

Introduction to KST

The Know Sure Thing (KST) is a momentum oscillator created by Martin Pring to simplify rate-of-change (ROC) readings for traders, making it easier for them to interpret. As a momentum indicator, KST is designed to help traders identify trends and potential entry and exit points and to signal possible reversals. Like other oscillators, such as the Moving Average Convergence Divergence (MACD), buy signals are generated when the KST crosses the zero line or makes a crossover above the signal line.

Example scanners based on Know Sure Thing

The Know Sure Thing (KST) oscillator can be used in Scanning the market. To see how exactly it can be used in this way, we provide the following samples. Both scanners search the market for stocks using this indicator.

The KST Formula

To understand the KST, it’s essential to break down its formula into its core components: the Rate of Change (ROC), the Smoothed ROC, and the final KST calculation.

Rate of Change (ROC)

The Rate of Change is a momentum indicator that measures the percentage change in price between the current period and a specified number of periods in the past. The ROC formula is as follows:

ROC = [(Current Price - Price N periods ago) / Price N periods ago] * 100

Smoothed ROC

The Smoothed ROC is calculated by applying a moving average to the ROC values. This is typically done using a simple moving average (SMA) with varying periods. The purpose of smoothing the ROC is to reduce noise and make it easier to identify trends.

KST Calculation

The KST calculation combines four different smoothed ROC values with different periods, usually 9, 12, 18, and 24. Each smoothed ROC is then multiplied by a specific weighting factor to give more importance to certain periods. The KST formula is as follows:

KST = (ROC1 * 1) + (ROC2 * 2) + (ROC3 * 3) + (ROC4 * 4)

Where ROC1, ROC2, ROC3, and ROC4 are the smoothed ROC values for the specified periods, and the numbers 1, 2, 3, and 4 represent their respective weighting factors.

Trading Signals

KST generates trading signals based on its movements and crossovers. There are two primary types of signals: buy and sell signals.

Buy Signals

A buy signal occurs when the KST crosses above the zero line, indicating a positive momentum shift. Additionally, a buy signal may also occur when the KST line crosses above its signal line, which is a moving average of the KST values.

Sell Signals

A sell signal is generated when the KST crosses below the zero line, indicating a negative momentum shift. A sell signal may also occur when the KST line crosses below its signal line, suggesting a potential reversal or downturn in the market.

Divergences

A Divergence happens when the price movement of an asset and the KST oscillator move in opposite directions. This can be a bullish divergence, where the price makes lower lows, and the KST makes higher lows, or a bearish divergence, where the price makes higher highs, and the KST makes lower highs. Divergence is a sign of potential trend reversal and can be used as a trading signal.

Limitations

As with any technical indicator, the KST oscillator has its limitations. It is essential to be aware of these limitations when using KST for trading decisions:

1. False signals: The KST oscillator may generate false signals, particularly in sideways or range-bound markets. This can lead to incorrect buy or sell decisions.
2. Lagging nature: As a momentum indicator, the KST is based on historical data and may lag behind real-time price movements. This can result in late entry or exit points.
3. Dependence on parameters: The effectiveness of the KST oscillator depends on the chosen periods and weighting factors. Different settings may produce varying results, making it crucial for traders to experiment with various combinations to find the most suitable parameters for their trading style.

Example strategy based on Know Sure Thing

The Know Sure Thing (KST) oscillator can be used in Testing Strategies. To see how exactly it can be used in this way, we provide the following sample. The strategy tests buying and selling rules built around this indicator.

The Bottom Line

The Know Sure Thing (KST) oscillator is a helpful momentum indicator that helps traders identify trends, potential entry and exit points, and trend reversals. By simplifying rate-of-change readings, KST makes it easier for traders to interpret and apply in their trading strategies. However, it is essential to be aware of the limitations of the KST oscillator and use it in conjunction with other technical analysis tools to enhance trading decisions. By understanding the principles behind the KST oscillator and applying them appropriately, traders can improve their market analysis and potentially increase their chances of success.