Understanding and Using KDJ Indicator in Trading

posted on

3 min

KDJ is an indicator designed with the sole purpose of making your trading efforts as effective as possible and certainly deserves your attention. KDJ can help you determine both the trend direction and optimal entry points.

For those familiar with the basic technical analysis tools, KDJ may seem similar to the Alligator and the Stochastic Oscillator. And just as the two above, it helps determine the trend direction/strength and optimal entry points.

It is worth mentioning that just as any other trend-following indicator, KDJ can and will provide a lot of false signals during the flat market. For this exact reason, it is believed by many traders to be worth using on longer timeframes.

How does it work?

KDJ consists of 3 lines (K, D and J — hence, the name of the indicator) and 2 levels. The K and D are the same lines you will see when using the Stochastic Oscillator. The J-line, in turn, represents the divergence of the D value from the K. The convergence of these lines will hint at emerging trading opportunities.

Three-line crossovers can be interpreted as buying and selling signals

Just as with the Stochastic Oscillator, oversold and overbought levels correspond to the times when the trend is likely to reverse. By default, these levels are set at 20% and 80%. Both can be adjusted for additional sensitivity / lower false alert count.

How to set up?

You can set the indicator in four easy steps:

  1. Go to ‘Indicators’ (bottom left corner of the screen);
  2. Go to the ‘Trend’ tab;
  3. Choose KDJ from the list of available options;
  4. Click Apply without changing the settings.

Your indicator is ready to use!

How to trade?

What kind of signals are you looking for? There are two types of signals you want to receive when trading with KDJ. When the three lines converge above the overbought level, with the blue line being above the yellow one, and the yellow line being above the purple one, you might consider selling the asset. And vice versa: when the lines converge below the oversold level, with the blue line being above the yellow one and the yellow line above the purple one, you might consider buying the asset.

Things to consider

For optimal results KDJ can be accompanied with other indicators, namely Average Directional Index (ADX) and Average True Range (ATR). The former is always ahead of the curve and can hint into an upcoming trend reversal. The latter is capable of determining the volatility of the market, which is especially useful since KDJ doesn’t work on the flat market.

Remember that no indicator is capable of providing accurate signals 100% of the time. From time to time even the best will fail, leaving you with a losing deal. No matter what kind of an indicator you rely on, don’t forget to follow basic risk management and capital allocation rules.

general risk warning

CFDs are complex instruments and entail a high risk of losing money rapidly due to leverage.

79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

NOTE: This article is not an investment advice. Any references to historical price movements or levels are informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future. Information regarding past performance is not a reliable indicator of future performance. Forecasts are not a reliable indicator of future performance. In accordance with European Securities and Markets Authority's (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.


you may also like