What is KDJ Indicator?
Contents:
What is KDJ Indicator?
The KDJ indicator is a technical indicator used to analyze and predict changes in trends and price patterns in trading assets. It is an efficient and convenient technical indicator, most commonly used in short-term and medium-term market trend analysis.
The calculation basis of KDJ is the highest, lowest, and closing prices. When prices are rising, the closing price tends to be near the upper end of the day’s range. Conversely, the closing price tends to be near the lower end of the day’s range in a downtrend. It can reflect the strength of price fluctuations, overbought and oversold phenomena, and give trading signals before prices rise or fall.
KDJ is a derivative form of the Stochastic Oscillator, the only difference is that there is an extra line called the J line.
KDJ contains a total of three lines, namely K line, D line, and J line.
Calculation
KDJ is to obtain the Immature Random Value (RSV) by calculating the proportional relationship between the highest price, the lowest price and the closing price in a specific period, and then calculating the K value, D value and J value according to the method of smoothing the moving average, and graphed to study price movements. Taking the calculation of daily KDJ value as an example, the specific calculation method is as follows:
1. Calculate the RSV value for a certain period:
- n-day RSV = (Cn-Ln) ÷ (Hn-Ln) × 100
- In this formula, Cn is the closing price of the nth day; Ln is the lowest price within n days; Hn is the highest price within n days. RSV values always fluctuate between 1 and 100.
2. K value of the current day = 2/3 × K value of the previous day + 1/3 × RSV of the current day
3. D value of the current day = 2/3 × D value of the previous day + 1/3 × K value of the current day
4. J value of the day=3×K value of the day-2×D value of the day
Note: If there is no K value and D value the day before, 50 can be used instead.
Applied rules
1. Overbought and Oversold
- The value of KDJ varies from 0 to 100 (J value sometimes exceeds).
- K line is a fast confirmation line—a value above 90 is overbought, and a value below 10 is oversold.
- D line is a slow mainline—a value above 80 is overbought, and a value below 20 is oversold.
2. Golden Cross and Dead Cross
- When the K line breaks through the D line on the graph, commonly known as the golden cross, it is a buying signal. In addition, when the K line and the D line cross upwards below 20, the short-term buying signal at this time is more accurate; if the K value is below 50, cross the D value twice to form a higher golden fork “W”. If there is no form, the price may have a considerable rise, and the market prospect is promising.
- When the K value gets smaller and smaller and then falls below the D line from above, it is often called a dead cross and is regarded as a sell signal. In addition, when K-line and D-line cross downward at gate 80, the short-term sell signal is more accurate. If the K value is above 50, crossing below the D line twice in the trend, and from the low dead cross “M” shape, the market outlook may have a considerable decline in stock prices.
3. Bottom and Top
- The J line is a directional sensitive line. When the J value is greater than 90, especially for more than 5 consecutive days, the price will form at least a short-term peak.
- On the contrary, when the J value is less than 10, especially for several consecutive days, the price will form at least a short-term bottom.
Limitations of KDJ
The main limitation of KDJ is that KDJ is very sensitive to price changes. In a very volatile market, it may generate wrong trading signals, causing the price not to follow the signal to rise or fall, thus causing traders to misjudge.
Technical indicators have their own limitations, and the use of technical indicators to judge market trends has great flexibility. Therefore, when investors use KDJ indicators, they should combine their own risk preferences with comprehensive consideration of investment varieties.
Reference:
https://www.tradingview.com/script/BNpuF7dG-KDJ-stochastic-indicator/