Basics of KDJ Indicator
KDJ indicator is a technical indicator used to analyze and predict changes in stock trends and price patterns in a traded asset. KDJ indicator is also known as the random index. It is a very practical technical indicator which is most commonly used in market trend analysis of short-term stock.
Short term stock trading refers to the strategies that could be put to use when the trading time frame from entry to exit ranges from a couple of days to a few weeks.
The usage of KDJ indicator is most preferred in the short term trading market. Short term trading could be risky and unpredictable. The stock market is volatile and many factors could influence the stock trend.
KDJ indicator calculation finds the range between an asset’s high and low price for a specific time period. The current price of the security is expressed as a percentage of the range. 0% indicates the lower limit and 100% indicates the upper limit of the range for the given time period.
The key reason for the usage of such an indicator is because the stock prices tend to close near the extreme values before turning points. The analysis of the short term stock trends with the help of KDJ indicator will be useful in making profits even when the market is low.
Working of KDJ indicator
The comparison of the current close value of the stock to the low, high and the range of a given period, creates two lines, %K and %D. The faster line is %K, the moving average of %K is %D which provides a signal line and %J is the difference between the other two lines.
Range values of KDJ
The three curves help in analyzing the relationship between the overbought stock, oversold stock trend and the divergence. The range of these indicators varies. K and D lines have a range between 0 to 100, while J can exceed 100 and below 0.
The interpretation of the KDJ values helps in determining the market condition of the stock traded. Either it is overbought or oversold. If value of J is negative while K and D on the bottom range, then it is an oversold condition. If the J value is beyond 100 while K and D on the top range, then it is an overbought condition. The parameters help you to decide whether it is good to buy, sell or wait and watch.
There are various technical tools available to do the market analysis, especially for short term stock. KDJ indicator is an effective tool for new entrants in the trading arena. KDJ analysis could be used effectively in various ways. One most effective way of interpreting the market momentum with the help of the KDJ indicator is by following the J line explained above.
Make use of the technical indicators effectively and efficiently to get the best out of your stock trading experience.