How to Use KDJ Indicator for Trading

Spread the love

The KDJ is your go-to indicator for determining the trend as well as when to make a trade. If you’ve worked with the Alligator or Stochastic Oscillator before, this indicator may be a little easier to use. The KDJ, like these two indicators, is not employed for trading in flat markets. Experienced traders appreciate the KDJ.

KDJ is an indication that was created with the sole intention of making your trading efforts as effective as possible, and it is well worth your time. KDJ can assist you in determining both the trend direction and the best entry locations.

KDJ may appear similar to the Alligator and the Stochastic Oscillator to people who are familiar with basic technical analysis tools. And, like the previous two, it aids in determining trend direction/strength and appropriate entry points.

It is worth noting that, like any other trend-following indicator, KDJ can and will give many false signals during a flat market. For this reason, many traders believe it is worthwhile to use on longer periods.

Discover more about KDJ.

KDJ, also known as random index, was first utilized in futures market analysis and is now frequently employed in stock market short-term trend research. KDJ is determined using the highest price, lowest price, and closing price. It can reflect the strength of price movements, identify overbought and oversold conditions, and provide trading alerts before prices rise or decrease. In the illustration, KDJ includes three lines.

The KDJ indicator functions similarly to the Stochastic indicator. “The Stochastic Oscillator is a momentum indicator that depicts the location of the close relative to the high-low range over a given number of periods,” as previously said. The indicator’s value can range between 0 and 100. In an uptrend, the closing price tends to be near the high, and in a downtrend, it tends to be near the low.

In terms of the KDJ indicator, values above 80 indicate overbought conditions, while values below 20 indicate oversold conditions. When the indicator enters the 80+ zone, it is a good indication to look for a sell setup or a sell signal, and when it enters the -20 zone, it is a good indication to look for a buy setup or a buy signal. Now, the thing is that if you only follow it like the previous statement, you could be very wrong because there are only a few things to know to improve your chances of trading success.

KDJ Calculation

KDJ determines the immature random value (RSV) by calculating the proportional relationship between the highest, lowest, and closing prices in a certain time, and then calculates the K, D, and J values using the smooth moving average method and draws a graph to evaluate the price trend. The following is the specific calculation procedure.

Calculate the RSV value for a given period first, followed by the K, D, and J values. By specifying different time periods, KDJ can characterize the characteristics of short-term and medium-term market volatility. In the case of the daily KDJ value, the calculating formula is as follows:

N-day RSV= (Cn-Ln) / (Hn-Ln) × 100.

In this formula, Cn is the n-day closing price; Ln is the n-day lowest price; and Hn is the n-day highest price. The RSV value is always between 1 and 100.

The values of K, D, and J are then calculated, and the formula is as follows:

K value of the day = 2gram 3 × previous day K value + 1 pound 3 × RSV of the day

D value of the day = 2pm 3 x previous day D value + 1pm 3 x K value of the day

J value of the day = 3 × K value of the day-2 × D value of the day

If there were no K and D values the previous day, you can substitute 50.

How to Use KDJ

Overbought and oversold

The KDJ scale runs from 0 to 100. (J values sometimes exceed). In general, an overbought signal happens when the D value exceeds 70, whereas an oversell signal occurs when the D value is less than 30.

Gold fork

When the K line on the graph crosses the D line, it is known as the golden fork, which is a buy signal. Furthermore, when the K-line and D-line cross upward below 20, the short-term buy signal is more accurate; if the K value is below 50 and crosses twice above the D value to form a higher golden fork “W” shape, the stock price may rise significantly and the market prospect is favorable.

Dead fork

When the K value decreases and subsequently falls below the D line from above, it is referred to be a dead fork and is seen as a sell signal. Furthermore, the short-term sell signal is more accurate when the K-line and D-line cross downward at gate 80. If the K value is greater than 50, crosses below the D line twice in the trend, and has a low dead cross “M” shape, the market outlook may indicate a significant drop in stock prices.

Bottom and top

J-line is a directionally sensitive line. When the J value exceeds 90, especially for more than 5 days in a row, the stock price forms at least a short-term peak. When the J value is less than 10:00, especially for several days in a row, the stock price will form at least a short-term bottom.

Technical indicators have their own limitations, and the use of technical indicators to judge the market trend itself has great flexibility. As a result, the above parameters are only for reference; investors should combine the use of KDJ indicators with their own risk preferences and comprehensive consideration of investment varieties.

How to Trade With KDJ Indicator ?

The KDJ indicator is comparable to the Stochastic indicator. It has the K and D lines, which, like other oscillating indicators, show overbought and oversold circumstances. The J line separates KDJ: it shows the departure of K from D and reflects the strength of the trend. The indicator oscillates between 0 and 100, indicating when the asset has become overbought or oversold.

Traders typically look for crossovers of the indicator’s lines to read the indicator’s signals. These are referred to as the golden fork and the dead fork.

The golden fork 

This crossover of KDJ lines implies that the asset has reached the oversold zone and that the trend is likely to reverse upwards soon. A Buy signal is generated when:

  • All three lines intersect at or near the 20 level (oversold area).
  • The indicator lines are rising from the crossover.
  • A bullish candlestick pattern is shown on the chart.

The dead fork

This crossover may suggest that the asset has reached overbought territory, and its price chart will soon invert and begin to fall. A selling signal is received when:

  • All three converge over the 80 line, indicating that the market is overbought.
  • Lines K and J intersect line D downwardly;
  • A bearish candlestick pattern is visible.

Adjustment of KDJ Settings

While the default KDJ parameters are 9, 3, 3, these settings may not always be ideal for particular times. The reason for this is that the period of 9 considers the preceding nine candlesticks. To smooth the price action, some traders choose to increase the indicator’s timeframe.

Consider the preceding case. KDJ is used here with the normal values of 9, 3, 3. The indicator generates a selling signal when the price hits the overbought zone; however, the rising trend persists long after the selling signal is generated. Following these cues, a trader may have missed out on potential better outcomes once the deal was closed. Traders can vary the duration of the indication to customize it and make it more general (the amount of candlesticks taken into calculation).

The same chart looks substantially different after changing the KDJ indicator with a period of 30. The indicator clearly smooths the price activity, fluctuates less, and only reacts to more substantial price fluctuations.

How do I Determine the Correct KDJ Indicator Settings?

It is critical to tailor the KDJ indication to your own trading style and asset in order to improve the indicator’s accuracy. Of course, this does not guarantee that the indicator will never make a mistake: divergence and false signals are still possible. There is no strategy or indicator that can consistently produce excellent outcomes. Choosing the indicator settings right, however, can boost one’s chances and aid in the entire trading strategy.

When calculating the period for an indicator, the general guideline is to increase the period for longer timeframes and lower it for shorter durations. Another method for calculating the period is to count the number of candlesticks between the most recent prior high and low and use it as the indicator’s period.

It is critical to practice adjusting indicator settings on the practice balance in order to master the skill. There is no pressure to make a mistake and no risk of losing actual money this way.


The KDJ indicator is a popular and helpful tool for determining potential trade entrances and exits. However, as with any indication, it might produce false signals and result in losses. Traders can learn to alter the indicator settings based on the timeframe they are trading in order to potentially increase their odds. The basic rule of thumb is to choose a smaller period for short durations and a larger period for long timeframes.

Spread the love