Technical Analysis - Common Indicator Uses
KDJ Indicator: King of Shortline Indicators, Acutely Predicting Reversal Sentiments
What is the KDJ Indicator?
The KDJ indicator is a very useful momentum oscillation indicator made up of three indicator lines K, D, J.
Many people also refer to the KDJ indicator as a “random indicator” because it actually adds a J line as an auxiliary on the basis of a traditional random indicator (containing only K, D lines).
The KDJ indicator has a certain degree of comprehensiveness, drawing on the advantages of the William Indicator (WMSR) and Moving Averages (MA) to help investors better judge market trends and identify potential opportunities for market reversals.
Compared to many other technical analysis indicators, the KDJ indicator is unusually sensitive to short line movements and is therefore hailed by some traders as the “king of short line indicators”.
Parameters and calculation methods of the KDJ indicator
When calculating the KDJ indicator, first obtain an “immature random value” —RSV, which is similar to the William indicator; then moving average processing of the RSV gets a value of K, which is mainly to smooth the RSV; then moving average processing of the K value gets a value of D; and finally, a J value is obtained based on K, D values。
Calculation method of KDJ indicator
RSV = (Current closing price -9 day minimum)/(9 day high price -9 day minimum) ×100
K = MA（RSV, 3）
D = MA（K, 3）
J = 3K - 2D
KDJ Parameters
The KDJ indicator contains three parameters that are used to calculate RSV, K value, and D value, respectively:
THE RSV DEFAULT PARAMETER IS 9, WHICH REPRESENTS THE POSITION OF THE CURRENT CLOSING PRICE RELATIVE TO THE RECENT 9-DAY HIGHS AND LOWS.
The default parameter for K value is 3, i.e. the 3-day moving average for RSV.
The default parameter for the D value is 3, which is the 3-day moving average for the K value.
Simply put, the K line is the basis of the KDJ indicator, the D line is the “signal line” (fork, dead fork signal), and the J line provides further decision information.
For example, assuming a stock's current closing price is $97, the most recent 9-day highs and lows are $100 and $90, respectively, then RSV = (97-90)/(100-90) ×100 = 70.
The meaning of RSV=70 is: If the highest price in 9 days is defined as 100 and the lowest price is defined as 0, then the current closing price is at 70 in the range of 0~100.
Key Points of the KDJ Indicator
The KDJ indicator evaluates momentum based on the closing price.
K, D values always oscillate up and down in the 0~100 range, while J values may be greater than 100 or less than 0.
The KDJ indicator can assess overbought and oversold.
Generally, K values above 80 are considered overbought; K values below 20 are considered oversold.
KDJ can release short line buy and sell signals.
The K line crosses the D line up at the low level as a fork, which is a potential buy signal; the K line crosses the D line at the high level down as a dead fork, which is a potential sell signal.
The KDJ indicator can be used to escape the top or the bottom.
When the J line rises above 100, there is a greater probability of forming the top of the market; when the J line falls below 0, there is a greater probability of forming the bottom of the market.
The KDJ indicator may be “attenuated”.
When the trend is strong, the KDJ indicator may continue to hover near the overbought or oversold area, a so-called “blunting” phenomenon. This usually indicates that the trend is strengthening, and at this time a fork or dead fork should not be viewed blindly as a reversal signal.
What to see KDJ | Case Study
FORK/FORK
Figure 1 is a cross or dead fork signal released by the KDJ indicator to aid trading. When the K line rises above 80, it means overbought, if the K line then crosses the D line downwards, a dead fork signal appears, which is a potential sell opportunity; similarly, when the K line falls below 20, it means oversold, and if the K line then crosses the D line upwards, a cross signal appears, a potential buy opportunity.
Back off
Figure 2 uses the KDJ indicator and the price movement to capture potential reversal opportunities. When the stock price breaks new lows, the KDJ indicator does not go lower in sync or even shows an uptrend. This phenomenon is called a “bottoming out”, suggesting that the stock price may move higher in the short term.
Trend Strengthening and Reversal
Figure 3 uses the KDJ indicator and MACD indicator to jointly confirm the trend intensification and determine the potential opportunity for a reversal of the trade. In a strong uptrend, the KDJ indicator may stay near the overbought area for a long time, hinting that the current trend is strengthening. This situation can be further confirmed by the MACD indicator, such as when the MACD indicator shows a clear bullish trend. In addition, it is also possible to determine the timing of a movement reversal based on these two indicators, for example, when both the KDJ indicator and the MACD indicator show a top break, the chances of a reversal downwards are greater.
Summary of KDJ Indicators
The KDJ indicator is a very useful momentum swing indicator primarily used to assess overbought and oversold.
The KDJ indicator is particularly suitable for use in turbulent markets, as KDJ indicators tend to be able to quickly release potential reversal signals when the market is oversold.
It should be noted that the KDJ indicator is very sensitive to short line movements, so error signals may be released frequently in some cases. In order to balance the KDJ indicator flaws, investors can use several lagging indicators at the same time to better support trading.
This content discusses technical analysis, and other approaches, including fundamental analysis, may provide different perspectives. The examples provided are for illustrative purposes only and do not reflect the expected results. All investments involve risk, including the potential loss of principal, which cannot guarantee the success of any investment strategy.
