Application #7 - Chapter 15 - Momentum III: Individual Indicators - KST

Covered in a previous post, we know that the Rate of Change (ROC) indicator is calculated by dividing the current price with the price n periods ago. This is great for a single time period but fails to take into account other operating cycles. In other words if we calculated ROC suitable for a daily chart, we would be ignoring the weekly and monthly charts which more closely tie into the primary trend.

To combat this problem, the Know Sure Thing (KST) was developed by Martin J. Pring, the author of the textbook. The naming is counter-intuitive as it implies certainty. In actual fact, the opposite is true - to quote directly from the book:

Most of the time, the indicator is reliable, but you "know" that it's not a "sure thing".

What is KST?

Simply put, it can be described as a summed ROC. To calculate KST, add the smoothed moving-average ROCs of different time periods together, having weighted the longer time spans higher than the lower ones. This has the effect of placing importance on the dominant trend so the indicator reflects primary movements, as well as short term movements.

This is then plotted in a similar way to ROC (Image 1 - green line), along with a signal line which is the KST 9-period moving-average (MA) (Image 1 - red line).

Image 1 - Know Sure Thing (KST) indicator for ADA/USD daily chart with default TradingView settings.

Signal Types

There are three signals that can come from a KST indicator:-

1. Change in indicator direction - this to me, would be a initial sign of change requiring confirmation.

2. Change in MA direction - certainly a degree of confirmation for signal number 1.

3. Crossover with the 9-period MA - this offers the highest level of confirmation for the KST without using other indicators. In Image 1, it's clear that the more pronounced signals over and under 300/-300 respectively produces a fairly worthwhile action point.

Notice that in the linear downtrend from Nov 2021-Mar 2022, the KST remains relatively flat compared to the more cyclical type movements seen between mid March and May. It is noted that KST, similar to ROC, should not be used in liner phases.

Further Considerations

KST certainly has it's uses and can be viewed as more reliable version of the ROC indicator. However, it does lend itself to similar drawbacks. It's strengths lie in a more complete picture and the ability to use it to help identify primary trends.

Two useful points mentioned that apply to oscillator characteristics are:

• Weak rallies indicate bearishness

• Weak reactions indicate a primary uptrend

These are extremely helpful points that aren't immediately obvious. Keep these in mind!