Description:
The KDJ indicator, derived from the stochastic oscillator, comprises three lines: K, D, and J. K represents the ratio of the closing price's distance from the lowest low to the highest high over a specified period, usually nine periods. D is a three-period simple moving average of K, offering smoothed signals. J is a further smoothed version of D, serving as a signal line. Traders utilize KDJ to assess momentum and potential trend reversals. Crossovers between K and D lines signal shifts in momentum, with bullish signals emerging when K surpasses D and bearish signals when it falls below. Additionally, readings above 80 indicate overbought conditions, signaling potential downturns, while readings below 20 suggest oversold conditions, hinting at possible upturns.
Input Parameters:
- K Length: Number of periods used in calculating the K line.
- K Mult: The difference between the closing price and the lowest low of the specific period, used to calculate the K line, typically set at 100 to convert the result into a percentage.
- K Smooth: Number of periods over which the K line is smoothed.
- D Length: Number of periods used in calculating the D line.
- D Mult: The multiplier factor applied to the K line in order to calculate the D line, generally a 3-period simple moving average.
- MA Type: Select the moving average type such as EMA, SMA, or HullMA.
Use Cases:
- Identifying Overbought and Oversold Conditions: Traders use the KDJ indicator to identify when a security is overbought or oversold. When the KDJ line rises above 80, it suggests that the security is overbought, indicating a potential reversal to the downside. Conversely, when the KDJ line falls below 20, it suggests that the security is oversold, signaling a potential reversal to the upside. Traders may use these levels to time their entries or exits in the market.
- Generating Buy and Sell Signals: Crossovers between the K and D lines can generate buy and sell signals. When the K line crosses above the D line, it indicates bullish momentum, suggesting a buying opportunity. Conversely, when the K line crosses below the D line, it indicates bearish momentum, signaling a potential selling opportunity. Traders may use these crossovers to confirm trends or reversals in the market.
- Confirming Divergence: Divergence occurs when the price of a security moves in the opposite direction of the KDJ indicator. Bullish divergence occurs when the price makes a lower low, but the KDJ indicator makes a higher low, suggesting that selling pressure is weakening and a bullish reversal may occur. Conversely, bearish divergence occurs when the price makes a higher high, but the KDJ indicator makes a lower high, indicating that buying pressure is weakening and a bearish reversal may occur. Traders may use divergence as a confirmation signal when making trading decisions.
This feature can be used in:
- Market Scanner
- Strategy Tester
- Multi-Factor Alerts
- Smart Checklist
Do you want to learn more? Check out our blogpost.