What is K-line and KDJ Indicator?
What is K-line KDJ Indicator?
This article is dedicated to day traders as we will learn how to use the KDJ Indicator for crypto trading, one kind of KDJ trading strategy, what to do during overbought and oversold situations, what is the percentage J of the KDJ Indicator and much more. Here we go!
What is K-line?
K-line, originated from the rice market of Japan in the late 18th century, was founded by a Japanese rice trader Munehisa, Honma. It's also known as candlestick, a technical analysis method about the price prediction of financial products like stock, gold, etc. in Asia.
In the transaction page of cryptocurrency exchange, we can often see the K line graph of cryptocurrency trend as follows. In the crypto trading market, the K line graph is the result of the direct opposition between buyers and sellers. With K line, you can know the open price, close price, high and low price of the cryptocurrency in a certain period. And it helps you to learn and study the fluctuation of cryptocurrency prices in a more intuitive way.
MA (Moving Average) indicator
The definition of the moving average in the financial markets is "the average of the price for N periods as a curve on your chart.
“In statistics, a moving average is a calculation used to analyze data points by creating a series of averages of different subsets of the full data set. In finance, a moving average (MA) is a stock indicator that is commonly used in technical analysis. The reason for calculating the moving average of a stock is to help smooth out the price data by creating a constantly updated average price” - Source: Investopedia.
What is KDJ?
The KDJ indicator works in much the same way as the Stochastic indicator. As a reminder, “the Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. The indicator can range from 0 to 100. The closing price tends to close near the high in an uptrend and near the low in a downtrend” - Source: fidelity.com
Concerning the KDJ indicator, above 80 it represents the overbought situations while below 20 it represents the oversold situations. So when the indicator is entering the 80+ zone, it is a good sign to look for a sell setup or a sell signal and when this indicator is entering the -20 zone, it is a good sign to look for a buy setup or a buy signal. Now, the thing is that if you follow it only like the previous statement you could be very wrong because there are few things to know to improve your success trades probability.
Like we stated earlier, the KDJ indicator is working in approximately the same way as the Stochastic but the KDJ has an extra line which is the purple line on Bitget, also called the J-Line.
How to find the KDJ indicator on Bitget?
On Bitget to find the KDJ indicator, follow these steps:
Click on "Original" at the top right of the graph
Then click on the "Indicators" icon
Within the band of indicators that appear below the chart, click on "KDJ"
Tada, you now have the KDJ indicator displayed below the chart
Notes: If you are using the TradingView view, you will not be able to display this indicator.
An example of KDJ strategy
We will present here a very simple and straightforward strategy by using the K-Line and the KDJ indicator.
As we have to use the KDJ in a market that is increasing or decreasing, let’s assume we use the KDJ indicator in a market that is increasing. That means the market is doing higher highs and higher lows. What to do following that strategy in this particular market is to look after where the percentage of the J-Line is entering in oversold or overbought conditions and cross over / cross below the K D lines.
The first thing to do to apply this strategy perfectly is to look at the general market trend. As a trader, you already know that the first thing you have to do is to define the core market structure. We have 3 types of market structures: uptrending market; downtrending market and sideway market.
As you do not sell in an uptrend market, the question is then, when do we sell? Of course, we don’t want to sell each time we see a retracement but we do not want to don’t make profits.
The thing that is important to remember is that for this KDJ strategy, if a market is in an uptrend, then you open a trade only in oversold conditions.
Another thing important to remember is that your stop-loss should be at the previous support.
The last thing to remember in this strategy is that your top-profit should respect a 1:1 ratio compared to your stop-loss.
It is recommended to use the KDJ indicator in a volatile market. Don’t use it in a market that is not volatile.
To be successful with the strategy presented in this article, follow the steps:
1 - Define the trend
2 - When the J-line enters in oversold or overbuy conditions (depending on the trend you have defined before), then open a trade
3 - Position your stop-loss at the previous support and your top profit by respecting a 1:1 ratio compared to your stop-loss.
* Disclaimer: This article is for educational purposes only and is not intended as investment advice. Qualified professionals should be consulted prior to making financial decisions.
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