KDJ Trading Indicator Guide
The KDJ Trading indicator MT4 is a trend-following indicator. Also, it helps in identifying the trend direction and its strength. Furthermore, the KDJ indicator MT5 spots potential entry and exit points so users may enter or leave the market whenever a reversal happens. In this course, we will explain the KDJ indicator for Tradingview and MetaTrader.
KDJ indicator FAQ
What is the KDJ indicator ?
The KDJ indicator is called also “KDJ trading indicator” or “KDJ averages indicator”. It is a technical analysis tool used a lot among professional traders to identify trend direction and strength similar to Advanced Decline Line. However, it is classified as a trend-following indicator. Furthermore, the indicator spots potential optimal entry points and alerts users immediately so they may lock in the highest possible profit from a certain asset. However, Professional traders advise using the KDJ along with other technical indicators. Preferably the ADX indicator (Average Directional Index) or the ATR indicator (Average True Range).
How does KDJ indicator work ?
KDJ indicator MT4 is quite hard to understand, Newbies should not use, because they may make tragic mistakes. It is constructed using 2 sub-components: lines and levels. The lines are 3: The K-line, the D-line, and the J-line. The levels are 2: Overbought level and Oversold level. We’re going to explain these sub-components in detail, starting with the lines:
- The K-line: Represents the fastest line. It shows the percentage value of the last Closing price about the total chosen price range.
- The D-line: It is slower than the K-line. It’s a simple moving average (SMA) of the K-line.
- The J-line: Represents the slowest line. It is a signal line of the divergence of the percentage D-value from the percentage of the K-value.
On the other hand, we have 2 levels: The overbought level and the oversold level.
- The overbought level: the level at which a security believed to be trading at a price level above its fair value. Generally, professional traders assign an 80% value for this level.
- The oversold level: the level at which a security believed to be trading at a price level below its fair value. Generally, professionals assign a 20% value for this level.
Note that the KDJ lines aren’t limited to 100%, they could surpass it!
Therefore, we should have the following results:
How to read KDJ indicator ?
Well! the decision rule is simple yet quite hard to detect and it needs a lot of concentration. Before starting, you should know that the decision rules in Metatrader are a little bit different than in Tradingview. So, for the MT4 and MT5 platforms the decision rules are as follows:
- Buy when the 3 lines cross each other below the oversold (20%) level. It’s a signal for a Long position.
- Sell when the 3 lines cross each other above the overbought (80%) level. It’s a signal for a Short position.
However, the decision rules for Tradingview are as follows:
- Buy when the 3 lines are below the 20% oversold level and the D-line is above the K-line, and the K-line in turn is above the J-line.
- Sell when the 3 lines are above the 80% overbought level and the J-line is on top, and beneath it is the K-line and on the bottom is the D-line.
To better understand this, we’re going to apply the KDJ decision rules of the indicator on MT4 and MT5 and then on Tradingview.
Example 1
As observed, there are 4 crossing points where there is an opportunity to either enter or exit the market. Cross Points 1 and 3 alerts of an entry opportunity, as the 3 lines crossed each other under the 20% oversold level. Therefore, traders or professional investors should enter a long position so they may lock in the highest possible profit. However, Cross Points 2 and 4 are warning of a possible trend reversal, therefore, traders should Sell at these 2 points or enter a Short position. Below is a KDJ trading example of the MT5 indicator using the Euro, US dollar forex pair.
Example 2
In this example, we’re analyzing Apple Inc. Stock on the NASDAQ Stock Exchange market. As observed, in Point 1, the 3 lines are above the 80% overbought level, where the J-line (red) is on top, the D-line (Green) is on the bottom and the K-line (Blue) is in the middle. Which signals the potential trend reversal and alerts users so they may either sell what they own or enter a short position. However, in point 2, the 3 lines went below the 20% oversold level and the D-line (Green) is at the top, the J-line (Red) is at the bottom and the K-line (Blue) is in the middle. This is a signal of a trend reversal as the indicator sent an alert to users so they may buy immediately to secure the maximum possible profit. Beneath is a trading example using the MT4 KDJ indicator in the NASDAQ index on Apple Inc stock.
Advantages and disadvantages
Advantages
- Useful in detecting potential trend reversals.
- Cannot be manipulated.
- Works on every asset and on any time frame.
- Spots potential entry and exit points accurately.
Disadvantages
- Hard to read and understand.
- May provide false signals in a market where there are little or no price movements.
- The J-line is the slowest line, thus, it could cause traders to miss some interesting opportunities.
Download KDJ indicator for MT4
KDJ indicator in MT4 has 2 levels where the 3 lines oscillate Above or Below. Thus, this MT4 trading indicator allows users to detect potential entry and exit points. In the following example, we can observe that the KDJ indicator MT4 has detected 2 successive points. The first point is an indication of a long position, in other words, it’s a potential reversal signal. Therefore, traders are advised to enter the market at cross point 1. However, Cross point 2, is an indicator for trend reversal, meaning, that the traders should either sell what they own or enter a short position.
Download KDJ indicator for MT5
KDJ indicator in MT5 does the same job in detecting price fluctuations. It uses the Price fluctuations to follow the current trend, but also to spot any potential reversal patterns. As observed, the KDJ indicator MT5 detected 2 Cross points one above the overbought 80% level and one below the oversold 20% level. The first cross point occurred after a sharp downtrend, which means that a potential trend reversal is coming, so traders should prepare to enter a long position. However, the Second cross point occurred shortly after the 1st cross point indicating the end of the uptrend and the start of a potential downtrend. Traders are advised to sell immediately or enter a short position so they may get the highest possible profit.
Download KDJ indicator for Tradingview
The KDJ indicator in Tradingview does also the same job as the KDJ indicator MT4 and KDJ indicator MT5. However, the reading method of the KDJ indicator Tradingview differs from MetaTraders. As the following example shows, this Tradingview indicator detected 2 Points of possible Entry/Exit. The 1st point contains the 3 lines above each other and Below the 20% oversold level, starting with the D-line on top, followed by the K-line in the middle to end up with the J-line on the bottom. This point refers to a potential trend reversal as the prices went down sharply before.
However, the 2nd point occurred not long after the 1st point where the 3 lines came above each other again but the 3 were Above the 80% overbought level. starting with the J-line on top, followed by the K-line in the middle to end up with the D-line on the bottom. Thus, the KDJ indicator Tradingview informs the users of the potential trend reversals so they may take action.
Conclusion
To conclude, the KDJ trading indicator is a trend following indicator, it helps identify trend directions and strength along with spotting potential entry points. It constructs using 3 lines (K-line, D-line, and J-line) and 2 levels (20% oversold and 80% overbought). However, the indicator works on all time frames and is compatible with every tradable asset. It is available for popular trading platforms such as MT4, MT5, and TradingView.
