Trading in all financial markets, including forex, stock exchange, or digital currencies, can be profitable. In addition to a good trading platform, a set of valuable indicators are crucial to your success in profiting from the financial markets. Undoubtedly, the indicators help you interpret the trading chart and understand the market movement and trend range. Technical indicators also help investors and traders identify the maximum purchase of an asset or its ultimate sale at any time and price changes. In this section, we discuss in detail one of the popular technical indicators, the KDJ indicator.
What is the KDJ indicator?
The KDJ indicator is a technical indicator used in stock and trading to predict future trends in the market. This indicator consists of three lines K, D, and J. Each line has a specific role in chart analysis. The KDJ indicator has a similar working principle as the three moving averages, but the KDJ indicator is highly accurate in predicting trend reversals. As a result, many casual traders use the KDJ indicator to trade on long time frames to earn profits.
How does the KDJ indicator work?
In this indicator, K, D, and J are three lines used to generate a trend reversal signal in trading. These three lines combine to create the KDJ indicator.
• K&D lines show an asset’s maximum buying or selling conditions like the RSI indicator.
• Line J shows the deviation of line K from line D.
Aim for K&D lines
When using the KDJ indicator, you should draw two horizontal lines at the 70 and 30 levels because this will help you determine the maximum buy or sell conditions. If the K&D lines rise above 70, the stock or option is overbought. On the other hand, if the K&D lines fall below 30, the stock is oversold.
The goal of the J line
The J line shows the strength of the trend. When a large impulse wave forms in the chart, the deviation between the k&D lines increases, and thus the J line increases. The J line can also go beyond the 100 level. It depends on the movement of the market.
How to add the KDJ indicator in the trading view?
It is easy to set this indicator in the business view. Keep in mind that KDJ is not an insider trading indicator. Members of the Trader community build it, but it’s free to use. Follow the steps below to add the KDJ indicator:
• Open the desired stock chart.
• Go to the “Indicator” top bar and search for the KDJ indicator.
• Select the KDJ indicator and add it to the chart.
• Apply these settings: “9 cycle mode” and signal TAG1.
• And the work is done. You have set the KDJ indicator.
KDJ indicator strategy
A trading strategy includes many parameters. For example, you cannot make a profit in trading by following a simple crossover of lines. This increases the trading probability by adding the intersection and proper risk management and money management rules. We always recommend pricing with indicators to create a trading strategy. Because a simple indicator can sometimes show you profitable results, but occasionally many indicators produce false signals. Therefore, you will lose all the profit.
There are several filters to consider when trading with the KDJ indicator:
• Candlestick pattern
• Range filter using levels between 30 and 70 numbers
How to trade with the KDJ indicator?
A buying signal is generated when the K, D, and J lines cross upwards. But you can add some conditions to increase the probability of purchase. A buy signal must have the following conditions:
• Downward crossover
• Bullish candlestick pattern
• The intersection of the K, D, and J lines must occur below the 30 level
A selling signal is generated when the K, D, and J lines cross each other in a downward direction. In this, you should keep the following conditions in mind:
• Ascending crossover
• Bullish candlestick pattern
• The intersection of lines K, D, and J must be above the 70 level
Things to consider when trading using the KDJ indicator
Using the KDJ indicator with other indicators such as Average True Range (ATR) and Average Directional Indicator (ADX) is better.
The Average Directional Index (ADX) indicates a possible trend reversal. Since KDJ does not perform well in a volatile market, ATR can help you determine market volatility with reasonable confidence.
Remember, indicators can only help you find a possible value and do not provide 100% confirmation. Therefore, it is essential to use appropriate capital injection followed by advanced risk management and capital management tools.
Pros and cons of the KDJ indicator
Like other indicators, KDJ also has some pros and cons, which we will mention below:
Pros of the KDJ indicator
• KDJ indicator is easy to understand, simple, and easy to interpret.
• KDJ indicator performs better when using other indicators such as stochastic oscillators.
• Ideal for identifying changes in price trends and finding optimal entry points.
Cons of the KDJ indicator
• KDJ index does not perform well in a volatile market.
• This indicator sometimes provides misleading information.
Things to keep in mind when using the KDJ indicator
With ADS and ATR, the KDJ indicator can produce optimal results to complement other indicators. Predicting the reverse process using the second state and leading to the first state is always possible. However, the KDJ indicator indicates market volatility as it does not work in flat markets.
Most beginner traders use a simple crossover strategy, but this strategy is not profitable. Instead, it would help if you always considered other things to increase your chances of winning because trading is a game of probabilities. The KDJ indicator is handy for determining trends and identifying entry points. However, this indicator can sometimes lead to false information like other technical indicators. Therefore, they should not be trusted absolutely. Using it with other technical indicators is better for making a more reasonable trading decision. TOBTC provides its readers with up-to-date and valuable information to grow and increase their knowledge of financial markets. Our goal is to help you get more profit from investing in the financial markets. You can share any questions or suggestions with us through comments or social networks.