Key points

● KDJ, also known as random index, is a technical index widely used in short-term trend analysis of futures and stock markets.

● KDJ reflects the intensity of price changes, signals of overbought and oversold.

● in volatile markets, KDJ is not necessarily effective.

Learn about KDJ

KDJ, also known as random index, was first used in the analysis of futures market, and now it is widely used in the short-term trend analysis of stock market. KDJ is calculated on the basis of the highest price, the lowest price and the closing price. It can reflect the intensity of price fluctuations, overbought and oversold, and give trading signals before prices rise or fall. KDJ includes three lines in the figure.

Calculation of KDJ

KDJ obtains the immature random value (RSV) by calculating the proportional relationship between the highest price, the lowest price and the closing price in a specific period, and then calculates the K value, D value and J value according to the smooth moving average method, and draws a graph to study the price trend. The specific calculation method is as follows.

First, calculate the RSV value for a certain period, and then calculate the K value, D value, and J value. KDJ can describe the characteristics of short-term and medium-term market volatility by setting different time periods. Taking the daily KDJ value as an example, the calculation formula is as follows:

N-day RSV= (Cn-Ln) / (Hn-Ln) × 100.

In this formula, Cn is the closing price of n days; Ln is the lowest price of n days; Hn is the highest price of n days. The RSV value always fluctuates between 1 and 100.

Then the values of K and D, J are calculated, and the formula is as follows:

K value of the day = 2gram 3 × previous day K value + 1 pound 3 × RSV of the day

D value of the day = 2pm 3 x previous day D value + 1pm 3 x K value of the day

J value of the day = 3 × K value of the day-2 × D value of the day

If there are no K and D values the day before, you can use 50 instead.

How to apply KDJ

Overbought and oversold

KDJ values range from 0 to 100 (J values sometimes exceed). Generally speaking, an overbought signal occurs when the D value is more than 70 and an oversell signal occurs when the D value is less than 30.

Gold fork

When the K line breaks through the D line on the graph, it is commonly known as the golden fork, which is a buy signal. In addition, when the K-line and D-line cross upward below 20, the short-term buy signal is more accurate; if the K value is below 50 and crosses twice above D value to form a higher golden fork "W" shape, then the stock price may rise considerably and the market prospect is promising.

Dead fork

When the K value gets smaller and smaller, and then falls below the D line from above, it is often called a dead fork and is regarded as a sell signal. In addition, when K-line and D-line cross downward at gate 80, the short-term sell signal is more accurate. If the K value is above 50, crossing below the D line twice in the trend, and from the low dead cross "M" shape, the market outlook may have a considerable decline in stock prices.

Bottom and top

J-line is a sensitive line of direction. When the J value is greater than 90, especially for more than 5 consecutive days, the stock price will form at least a short-term peak. On the contrary, when the J value is less than 10:00, especially for several consecutive days, the stock price will form at least a short-term bottom.

Technical indicators have their own limitations, the use of technical indicators to judge the market trend itself has great flexibility, therefore, the above parameters are only for reference, investors in the use of KDJ indicators, should be combined with their own risk preference with comprehensive consideration of investment varieties.

Limitations of KDJ

The main limitation of KDJ is that KDJ is sensitive to price changes, which may generate wrong trading signals in very volatile markets, causing prices not to rise or fall with the signals, thus causing traders to make misjudgments.