Identifying Trends With The KST Indicator by Martin J. Pring
The direction of price is influenced by different time cycles. Important market turns occur when a number of these cycles are changing direction. The KST indicator is an oscillator designed to identify market turns based on the existence of these time cycles. Here, noted author Martin Pring presents the application of different-length KSTs to identify important market moves.
Last time, I introduced the KST indicator, which is an oscillator that combines several smoothed rates
of change and then weights them according to their time span. (See sidebar, "The KST indicator.") The
concept behind the oscillator is that price trends are determined by the interaction of many different time
cycles and that important trend reversals take place when a number of price trends are simultaneously
changing direction. The KST cannot include all possible cycles and combinations, but it performs better
than a simple momentum oscillator that can only reflect one cycle or combination of cycles . Different
KSTs have been designed to reflect short-, intermediate- and long-term (primary) trends. The goal is to
obtain an indicator to capture important market moves for a particular time frame while minimizing
whipsaws. Buy and sell signals are triggered when a specific KST crosses its designated moving average,
simple or exponential. However, the confirmation of a trend reversal in the actual price such as a moving
average crossover or price pattern completion is also necessary.
THREE MAIN TRENDS
It is common knowledge that several trends operate in the market at any particular time, ranging from
intraday and hourly trends to very long-term or secular ones developing over a 20 or 30-year period. For
investment purposes, the most widely recognized are short-, intermediate and long-term trends.
Short-term trends (that is, those that range from two to four weeks) are usually monitored with daily
prices, intermediate (six weeks to six months) with weekly, and long-term (one to three years) with
monthly prices. Figure 1 reflects a hypothetical bell curve incorporating all three trends.
From both an investment and trading point of view, it is important to understand the direction and maturity of the main, or primary, trend. In the same way that a rising tide lifts all boats, short-term rallies
in a bull market are much more profitable than when the market tide is retreating — that is, in a bear
market. If you want proof, try comparing the results of short-term buy signals for mechanical trading
systems in a bull and bear market environment. An indicator that can give you a reliable hint, not only of
the direction but also the maturity of the primary trend, can be invaluable.