Introduction to the KDJ Indicator
The KDJ Indicator is a momentum indicator which shows the momentum direction and reversals as an oscillator. It shares some similarities as the Stochastic Oscillator but plots lines which are characteristically different from it. It is characteristically very responsive to price fluctuations making it suitable for short-term mean reversal signals.
What is the KDJ Indicator?
This indicator plots three lines, lines K, D, and J. This is where the name, KDJ Indicator comes from. In this version of the KDJ Indicator the K line is represented by the red line, while the D line is represented by the green line. Both lines are calculated based on the same concept as the Stochastic Oscillator lines. The J line is represented by blue line and is the divergence between the K and D lines. Crossovers between these three lines are indicative of a momentum reversal.
This indicator also has markers at levels 20 and 80. The area below 20 indicates an oversold price level, while the area above 80 indicates an overbought price level. Crossovers developing beyond the 20 to 80 range are indicative of a possible mean reversal.
How the KDJ Indicator Works?
The KDJ Indicator uses a formula which is quite similar to that of the Stochastic Oscillator. In fact, the K and D lines are calculated based on the same concept as the Stochastic Oscillator lines. The J line is simply the divergence between the two lines.
How to use the KDJ Indicator for MT4
The KDJ Indicator has three variables which can be used to modify its sensitivity and characteristics.
“nPeriod” refers to the n number of periods used to calculate for the lines.
The “factor_1” and “factor_2” variables alter the characteristics of the oscillations of the lines. These variables can smoothen and widen the oscillations of the lines.
This indicator is best used as a mean reversal signal indicator. Traders can use the crossover signals developing below 20 or above 80 as a mean reversal signal.
Buy Trade Setup
When to Enter?
Open a buy order as soon as the red line crosses above the green and blue lines while coming from below 20. Set the stop loss on the support below the entry candle.
When to Exit?
Close the trade as soon as price action shows signs of a possible bearish reversal.
Sell Trade Setup
When to Enter?
Open a sell order as soon as the red line crosses below the green and blue lines while coming from above 80. Set the stop loss on the resistance above the entry candle.
When to Exit?
Close the trade as soon as price action shows signs of a possible bullish reversal.
Conclusion
This indicator can be a useful tool for identifying potential mean reversal signals. It has all the elements necessary to objectively identify oversold and overbought markets as well as its potential mean reversal. It is relatively reliable compared to other reversal signals. However, it is not perfectly accurate. Traders can make use of confluences coming from other technical indications as well as price action to improve the accuracy of its signals.
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