KDJ Stochastic Indicator (KDJ)
What is a KDJ indicator?
KDJ indicator is a technical indicator used in asset trading to predict the upcoming trend in the market. It is derived from the stochastic oscillator with the one difference being the addition of the J line. The stochastic is a momentum indicator comparing the location of an asset’s closing price with the high and low price range during a specified period, and it can be used to identify overbought and oversold levels in assets.
The KDJ works in much the same way as the Stochastic Oscillator indicator, and it consists of three lines K, D and J line. The K and D lines are identical to those used in the Stochastic Oscillator. Values of K and D line show if the asset is overbought (over 80) or oversold (below 20). The moments of K crossing D are the moments for selling or buying. The J line represents the divergence of the D value from the K value. The value of J can range from 0 to 100 for %K and %D lines on the chart.
KDJ indicator trading strategy
- Identify overbought and oversold levels
The most common signal is based on where the J line is in the range. Generally, the J line above 80 indicates an overbought territory, while the J line below 20 is considered an oversold territory. A sell signal is given when the J line is above the 80 level and then crosses back below 80. Conversely, a buy signal is given when the J line is below 20 and then crosses back above 20. 80 and 20 are the most common levels used but can be adjusted as needed.
A crossover signal occurs when the J line crosses above the K line and D line. A sell signal occurs when the J line crosses below the K line and D line in the overbought region. Conversely, a buy signal occurs when the J line crosses above K line and D line in the oversold region.