As a trader, you are probably already aware of oscillators. They tell you whether the market is overbought or oversold. You’ll find plenty of oscillators in your trading terminal. All of them work the same way. However, the calculation formula for each oscillator is different. So, every oscillator can signal overbought or oversold market conditions in a different manner. KDJ is one such indicator which is a modified form of the popular Stochastic oscillator.
What is the KDJ Indicator?
KDJ is a simple MT4 oscillator indicator that tells you whether a currency pair might be oversold or overbought. Oversold conditions tell you that the bearish trend may get exhausted, and the market provides a buying opportunity. Overbought conditions tell you that the bullish trend may get exhausted, and the market provides a selling opportunity. Here’s how it looks on the chart:
The K, D, and J lines appear on this indicator. This is the origin of the name KDJ. Red lines indicate the K line, while green lines indicate the D line in this version of the KDJ indicator. They are calculated similarly to stochastic oscillator lines. The blue line represents the difference between K and D. The crosses between the three lines show a momentum reversal.
Moreover, this indicator has markers at level 20 and 80. Prices below 20 indicate oversold conditions, while prices above 80 indicate overbought conditions. It really is quite simple to understand but does have false signals if trading it blindly. I would confirm all the KDJ signals with further chart analysis before taking a position.
KDJ Trading Strategy
KDJ’s formula is very similar to that used by stochastic oscillators. K and D are calculated based on the same concept as the stochastic oscillator lines. The divergence between lines K and D is represented by line J. Let’s take a look at the indicator’s settings:
Statistical moderators and sensitivity can be determined using the KDJ indicator. The “nPeriod” parameter calculates rows by naming n periods. There are two variables that change the vibrating lines: “factor_1” and “factor_2. Line oscillations can be smoothed and amplified by these variables.
A simple way to trade the KDJ indicator is to look for a long entry when the KDJ value drops below the 20 level. Similarly, you can look for a selling opportunity when the KDJ value exceeds the 80 level. You can also keep an eye on the KDJ lines crossing upwards or downwards to confirm the possible start or end of a currency pair trend.
Buy Signal
Let’s take a look at the buy setup of KDJ:
- The KDJ indicator’s value should drop below the 20 mark.
- You should wait for the price to find a rejection. Ideally, a bullish engulfing bar may provide a better opportunity.
- You can put the pending buy order slightly above the high of the bullish candle.
- You can place the stop-loss slightly below the low of the bullish candle.
- You can use the next resistance as your take profit. Alternatively, you can exit in profit when the KDJ value exceeds the 80 level.
Sell Signal
Let’s take a look at the sell setup of KDJ:
- The KDJ indicator’s value should go beyond the 80 mark.
- You should wait for the price to find a rejection. Ideally, a bearish engulfing bar may provide a better opportunity.
- You can put the pending sell order slightly below the low of the bullish candle.
- You can place the stop-loss slightly above the high of the bullish candle.
- You can use the next support as your take profit. Alternatively, you can exit in profit when the KDJ value drops to the 20 level.
Conclusion
The KDJ indicator is a simple tool that lets you know the market’s current phase and potential reversal. However, the strong trends may ignore the overbought or oversold conditions. I have often seen price continue to move up or down even in the extreme zones. Hence, you should confirm all signals with any other indicator to enhance your strategy and always make sure you are using sensible money management to control losses.
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