Trading Crash Course | How to use the KDJ indicator to Trade Cryptocurrencies

- The KDJ indicator helps traders to identify possible trends in the market.
- One of the roles of the indicator is to show overbought and oversold market conditions.
- In order to get more reliable signals traders should combine the KDJ indicator with other technical analysis tools such as the Average Directional Index (ADX) and the Average True Range (ATR).
- The KDJ indicator often gives false signals during range markets.
- Significantly, Gate.io has a wide array of technical analysis indicators, including the KDJ one.
Keyword: Cryptocurrency, technical analysis tools, technical indicator, KDJ indicator, overbought, oversold, trend reversal, random index,momentum indicator, stochastic indicator


Introduction
Irrespective of the market that one is trading in it is important to make informed decisions to remain profitable. Apart from having a reliable trading platform, a trader should have a set of technical analysis tools to use. These indicators have different roles such as predicting trends and showing momentum of assets. Basically, the indicators enable traders to analyze and understand trading charts. Today, we focus on the KDJ indicator.




What is the KDJ indicator?

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The KDJ indicator, also called the random index, is a technical analysis tool that measures the momentum of an asset, thereby indicating its oversold and overbought conditions. As a trend-following indicator, the KDJ helps traders to identify optimal trade entry and exit points.

It is also important to understand that the KDJ indicator was derived from the stochastic indicator. However, the stochastic indicator has only two lines, K and D. The name KDJ comes from the three lines, K, D and J, where each line plays an important role in identifying the overbought and oversold zones.

The lines K, D and J have different speeds, a factor that makes them very useful in predicting trends and momentum. K is the fastest line while D is the slowest one. As such, J is a medium index. In most cases, D is the blue line; K is the yellow one, while J is red or purple. However, the colours may vary depending on the platform you are using.

J shows the deviation between lines D and K. In other words, it represents the difference or divergence between D and K. The calculation of the KDJ indicator is based on the lowest and highest prices of an asset as well as its closing value per period. You can notice the three lines in the following graph.


As you observe on the graph, the lines converge several times.


How do the KDJ indicators work?

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Similar to the stochastic oscillator, the KDJ indicator has values that range from 0 to 100. It is essential to note that the values of J can exceed 100 or fall below 0. However, most trading software systems maintain the values between 0-100.

The KDJ value that lies between 80 and 100, the two figures included, indicates that the asset is overbought. On the contrary, a value which is 20 or less shows that the asset is overbought. However, each individual trader can set his/her preference regarding the overbought and oversold territories. The territory between 20 and 80 is called the wandering zone and has very little significance when making trading decisions.




How to use the KDJ indicator

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Mostly, when the three lines converge that signifies a trading opportunity. For example, the KDJ indicator generates sell signals when the three lines converge within the overbought territory. In addition, there should be a bearish candlestick that confirms the sell signal. The following figure shows a possible sell signal, the bearish crossover.


As you note, at the sell point there is a crossover within the overbought territory. Also, notice the accompanying bearish candlestick which acts as a confirmation.
Buy signal

The KDJ indicator generates a buy signal when the three lines converge within the oversold zone. This is because the oversold zone, just like the overbought one, indicates a high possibility of a price reversal. However, it is wise to combine the KDJ indicator with other tools such as the Average Directional Index (ADX) and the Average True Range (ATR) indicator.


This graph shows the sell signal and the buy signal. There are a few things you should take note of. At the sell signal point, the blue line is at the bottom, the yellow one in the middle, and the purple one at the top. The order of the lines is different with the buy signal. In this scenario, the blue line is on top, the yellow one in the middle and the purple one on the bottom


How to use the KDJ indicator at Gate.io

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In order to add the KDJ indicator on the trading chart, you should click on “KDJ” you find below the chart, as indicated in the diagram.


Once you do so, you will be able to see the indicator on your trading chart. Remember that it appears on the bottom of the chart.



Advantages of the KDJ Indicator

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The KDJ indicator is fairly accurate in predicting trends since it is sensitive. Also, it is very reliable in showing the overbought or oversold market conditions.

In addition, the indicator is suitable for various assets such as cryptocurrencies, commodities and forex. It works fairly well with the various time frames.


Disadvantages

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Its main disadvantage is that it sends out the signals too early which can mislead the traders who want to enter or exit their trades. Also, it gives false signals during sideways markets.


Conclusion

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In summary, the KDJ indicator is suitable for the crypto, forex and commodities markets. Its major role is to predict trend reversals. The convergence of the three lines, K, D and J, indicates trading opportunities. When the three lines converge in the overbought zone it is a sell signal. However, if they converge in the oversold territory it is a buy signal. Gate.io, the crypto exchange, has various technical tools including the KDJ indicator.



Author: Mashell C., Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.