Stochastic Oscillator (KDJ) is a typical interval oscillation indicator. The figure below shows that the KDJ indicator value fluctuates between 0-100 and will not exceed this range. Most of the time it fluctuates between 20-80.
The KDJ oscillation index is effective in predicting when the price will hit the top or bottom. The oscillation indicator, in conjunction with price and trading volume, constitutes the three main elements for traders to consider when judging market status. The indicator operates in the following manner:
The K and D values are between 0-100. When the K and D values are above 50, it indicates the market goes in a bullish trend and it is time to open long positions. If the K and D values fall below 50, it means the bearish trend is dominant, and traders are suggested to short. The following table summarises the possible market movements corresponding to different K and D values :
1.When the K line and the D line are both below 50, and the K line goes upward to break through the D line, it indicates that the market is experiencing a round of strong rise, and it is time to buy more assets or hold the current positions. This cross formed by the two lines is a form of the golden cross of the KDJ indicator. As shown below…
2.When the K line and the D line are both below 20, and the K line moves up to break through the D line, it indicates that the sluggish trend is about to end and bullish market will ensue. The price will stop falling and rebound. The two lines meet to form another form of golden cross of the KDJ indicator. As shown below:
3.When the K line and D line are both greater than 80, and the K line falls to cross the D line, it indicates that the market is about to turn from a bullish trend to a bearish trend, and the currency price will fall. Once the cross is formed, also known as a KDJ death cross, it is time to get rid of your assets.
4.When the K line and the D line are both greater than 50, and the K line falls to break through the D line, it indicates that the market will experience another round of decline, and the currency price will fall. In such case, traders are suggested to sell assets or just wait and see. This fork is another form of KDJ death cross.
The KDJ oscillator is a commonly used trading indicator but one should avoid mindless use of the indicator without figuring out the trading scenario. There is no universal method that will work for all trading cases. Traders should combine the use of a KDJ oscillator and other technical analysis, verifying the results from multiple perspectives.
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