Part I: Meaning and Form
KDJ, also known as the stochastic indicator, originated in the futures market and was later widely used in the stock market. The algorithm of this indicator is very complex. It is an indicator that reflects the strength of price trends and overbought and oversold conditions by calculating the fluctuations between the highest, lowest and closing prices within a certain period of time. We can roughly understand it as an oscillating indicator used to judge the short-term and medium-term trends of stocks. In terms of settings, it is also like the moving average MA, and you can set the cycle yourself. Generally, the default cycle in our software is 9, which means that the statistics are the values obtained from the data of the past 9 trading days.
From a morphological point of view, KDJ is formed by three curves, which represent the speed of stock price trend changes. Generally speaking, these three curves turn upward to form a golden cross, which is a signal of a good short-term trend, and turn downward to form a dead cross, which is an avoidance signal. In addition, the three curves run within a certain range, which distinguishes the state of the stock price from strong to weak. First of all, the KD value generally runs between 0-100, with 50 as the watershed of strength and weakness. If it is greater than 50, it is a bull market, and the market outlook is bullish; otherwise, it is a bear market, and the market outlook is bearish. The J value can be negative or greater than 100 because it is more sensitive. Then according to these values, the stock status is divided into five major areas: consolidation area, overbought area, oversold area, severely overbought and severely oversold.
Part 2: Practical skills of KD
1. KD value
(1) Determine overbought and oversold
The value range of KD is 0-100, above 80 is the overbought area, below 20 is the oversold area, and the rest is the hovering area. However, it is worth noting that this division is only a signal prompt. In practice, it is best to combine the J value and other top and bottom signals, and the probability of success is greater. Let's take a look at an example. As shown in the figure, Shenzhou Taiyue, position ①, the KD value has gone below 20. At this time, on the one hand, the J value is below 10, which represents the oversold area, and on the other hand, the MACD underwater green column is shortening, the downward potential is weakened, the indicator resonates, and the buy signal is generated. The stock price will rebound as expected. At position ② in the figure, the KD value enters 80, and the MACD red column above the water is shortened instead, indicating that there is insufficient momentum to continue to rise, and the stock price will indeed fall.
(2) Determining top and bottom divergences
Top divergence is a sell signal, bottom divergence is a buy signal. The so-called top divergence refers to the stock price reaching a new high, but the KD value does not reach a new high; or the KD value reaches a new high, but the stock price does not reach a new high. The so-called bottom divergence refers to the stock price reaching a new low, but the KD value does not reach a new low; or the KD value reaches a new low, but the stock price does not reach a new low. Two examples are also given to illustrate. For example, the stock price of China Heavy Industry in the figure below has risen for a wave, and when the stock price rises to 7.10, the stock price reaches a new high. If you look at the KD indicator and draw a horizontal line, you will find that when the stock price reaches a new high, the KD value does not reach a new high, but instead falls below the horizontal line. This is a top divergence, a sell signal. Another example is Wanda Information. It can be seen intuitively from the figure that when the stock price reaches a new low, the KD value does not fall but rises, and then Wanda Information has a beautiful rise. This is a bottom divergence, a buy signal.
2. KD curve shape - head and shoulders or multiple tops (bottoms)
When the KD indicator forms a head and shoulders pattern or multiple tops (bottoms) at a higher or lower position, it is a signal to take action. In simple terms, it means that the top or bottom of the stage has appeared. However, it should also be noted that these patterns must appear at a higher or lower position, and the higher or lower the position, the more reliable the conclusion. Just like the Chaoxun Communication in the figure, from the perspective of the KD indicator, a multiple top pattern of more than 80 appeared first, a buy signal, and the stock price began to consolidate and fall accordingly. Later, the KD value fell below 20, forming a W bottom near 10, and a buy signal appeared. If you buy, you can reap the next rebound.
3. KD crossover
The general principle is to buy when the KDJ crosses and sell when the KDJ crosses. It should be noted that when we usually say KDJ crosses, we are actually only referring to the two KD lines, not the intersection of the three lines. Next, we will introduce several situations of KD crossing.
(1) One crossover
This is the simplest, just look at the example. If the K line crosses the D line from bottom to top, it is a golden cross, short-term bullish, you can buy and reap a certain profit. When the K line crosses the D line from top to bottom, the position of the green box in the figure, you should sell at this time to avoid risks. This is the so-called golden cross buy and dead cross sell. However, it should be noted that the cross application of KD has a moving average first principle, that is, if the stock price is below the moving average for a long time and is suppressed by the moving average, then after the golden cross, although there is a possibility of oversold rebound, it can only be operated in the short term, and medium and long-term operations are avoided. This is the premise for the use of KDJ.
(2) Secondary crossover
Here we can divide it into secondary golden cross and secondary dead cross. The secondary golden cross is a better buy signal, while the secondary dead cross is a stronger sell signal. The so-called secondary golden cross refers to the KDJ having two golden crosses near the low value of 20, indicating that the short-term market or individual stocks have confirmed the rise, and they can be held in the medium and long term. The secondary dead cross refers to the KDJ having two dead crosses near the high value of 80, indicating that the short-term market or individual stocks have confirmed the fall, and the operation should be decisively avoided. The higher the value and the lower the value of the cross, the higher the success rate of the operation.
In the figure ① below, the share price of GEM rose to a staged high, and KDJ formed two high-level dead crosses near 80. The divergence between KDJ and the share price was superimposed, and the share price turned from rising to falling. If you did not sell after seeing the two dead crosses, you would have to bear the decline all the way. And in the figure ②, the share price of Tsingtao Brewery reached a staged low of 29.09, and then the KDJ indicator formed two golden crosses quickly near 20, superimposed with the divergence signal, indicating that it is possible to buy at the bottom. The share price really rose all the way. So sometimes you don’t need to rush to operate when you see a golden cross, because the success probability of a second cross is higher than that of a single cross.
(3) Multiple crossovers
In the consolidation zone of 20-80, the stock price generally fluctuates, so KD will also have multiple golden crosses and dead crosses. At this time, it is best to wait until the trend is clear before operating, otherwise it will be a bit of gambling. Just like Fuyao Glass in the figure, the stock price is consolidating at a low level and taking a box shape. At this time, the KDJ indicator has multiple golden crosses and dead crosses in the consolidation zone, especially between 20-60, and the corresponding stock price is just consolidating, so the golden cross or dead cross at this time is not very meaningful. We can wait for KD to enter below 20 or above 80, and then operate after there is a clear signal. For example, it is not too late to wait for the rejection of the dead cross in the figure to appear before taking action.
(4) Invalid crossover
In practice, we will find that sometimes we are ready for a golden cross or a dead cross, but in the end it does not cross successfully. This is called an invalid cross or a rejected cross. Here we will focus on the rejected dead cross used to capture short-term buying points.
①One rejection
After rising for a period of time, the stock price needs to be corrected. If the KD value turns downward to wait for a death cross, but it does not actually happen, it means that everyone's selling pressure has been repaired. This is when the first buying point appears. If combined with the moving average or the fishing season support line, the success rate is higher. For example, in the figure, the stock price of Xiongtao shares is in the process of the main rising wave, and the staged increase is relatively large. There is profit-taking selling, so the stock price falls back, and KD turns downward to prepare for a death cross, but it stabilizes and does not really cross. At this time, it is found that the stock price is supported by MA, the indicators resonate, and buying can make a profit. Of course, the rejection of the death cross will also appear in the transition from a downward trend to an upward trend, and no example will be given here.
② Second rejection
As the name implies, two rejections of the death cross, this time the buy signal is stronger; if there are multiple consecutive rejections of the death cross, it is even better, this situation shows that the upward momentum is sufficient, the stock will generally rise higher, it is a start signal for the rise. The figure below is China Ping An, the KDJ indicator has two rejections of the death cross, the stock price continues to rise. It is not until the high-level death cross appears that the risk is prompted and the profit should be taken out.
Part III: Practical Skills of J Value
In general, the J value will run between 0-100 like the KD value, but because it is the most sensitive, it will go to 100 or below 0. At this time, the J value belongs to the abnormal price area, greater than 100 is overbought, and less than 0 is oversold.
In actual operation, J line is used as a direction sensitive line. When its value is greater than 90, especially for many consecutive days, the stock price will at least form a short-term head. On the contrary, when J value is less than 10, especially for several consecutive days, the stock price will at least form a short-term bottom. This was mentioned when introducing the KD value above. I will not give examples here. In actual operation, it can be combined with KD value or other top and bottom signals.
Regarding the J value, I would like to add that when KD fluctuates repeatedly around 50, the market is in the process of consolidation. At this time, there is a small trick that you can use the J value to observe the deviation dynamics. If the deviation is very large, it will most likely be repaired. However, 20-60 is the consolidation zone after all. In fact, it is best to operate after the signal is clear. Therefore, if you really want to use the deviation of the J value at this time to operate, it can only be ultra-short-term, and it is only an auxiliary signal.
Part 4: Comprehensive application of practical skills
1. KDJ high and low positions are "passivated"
Passivation is also a blind spot of indicators. Simply put, the so-called passivation means that the indicator will lose its original guiding significance at a certain stage or under certain circumstances. It is like the traffic lights at the intersection are broken. The red light no longer means that cars are prohibited from passing, and the green light no longer means that cars can pass.
The passivation of KDJ generally helps us to judge the top or bottom of the stage. As shown in the figure, positions ① and ② are both high-level passivation of indicators. At this time, the J value has risen and cannot rise any further, and cannot drive K to judge the next direction. Position ③ in the figure is low-level passivation, because at this time the J value has fallen and cannot fall any further, and cannot drive the trend of K. In both cases, there is no need to rush to sell or buy at the bottom. Because you don't know when the passivation will be completed, if you sell in advance when the high-level passivation is in progress, you may miss the next wave of good market conditions, but if the low-level passivation is in progress, you see that the KDJ indicator enters the oversold zone and thinks you can buy, but the result may be to buy halfway up the mountain. So, in a word: don't rush to buy or sell when passivation occurs, wait until the golden cross or dead cross before operating.
2. KDJ crossover + extreme overbought and oversold
The above introduces the KDJ's single cross and double cross buying and selling methods. If the values of the three superimposed KDJ lines reach a certain level, it is multiple insurance, which is equivalent to the indicator resonance we said, and you can operate decisively. However, it should be noted that the three KDJ values here must be strictly implemented to have a high probability of success.
(1) Golden Cross + Extremely Oversold (K＜10, D＜20, J＜0)
As shown in the figure is the stage trend chart of Guosheng Financial Holdings. At position ① in the figure, the KDJ indicator forms a golden cross in the oversold area, and the most sensitive direction line J value has fallen below zero. Then the stock price reversed and rose from 8.08 to 16.35, an increase of 100%.
(2) Death Cross + Extreme Overbought (K＞90, D＞80, J≥100)
Similarly, for Guosheng Financial Holdings, after rising by 100%, KDJ formed a second death cross in the high value area above 80, which is the position ② in the figure. At this time, not only K>90, D>80, but also the value of J has exceeded 100, entering the serious overbought area. The superimposed stock price K-line chart also happened to have a double top pattern, and the sell signal is more certain. Therefore, the first death cross here indicates risk and positions should be reduced, while the second death cross should be decisively liquidated.
3. Multi-period combination of KDJ
(1) Combination of intraday short cycles (minute, 30-minute, 60-minute)
For short-term traders who trade in small waves, 30-minute and 60-minute KDJ are important reference indicators; for investors who have designated a buy and sell plan and place an order immediately, the time-sharing KDJ can provide the best entry and exit time. Therefore, we can use the resonance of these intraday short-term indicators to operate in the short term and avoid always selling at the lowest point of the day or buying at the highest point of the day.
For example, the specific method to buy at a higher point: 60-minute golden cross area → 30-minute golden cross area → intraday high dead cross → sell.
Example: The following figure shows the 60-minute, 30-minute and intraday trend charts of New Hope on March 31. From the following figure, we can see that the 60-minute KDJ is in the golden cross zone, and the three values are near the high of 80. Let's look at the 30-minute KDJ, and we find that the three values are also in the golden cross zone, but there are signs of a high decline. Finally, let's look at the intraday chart. KDJ has a second high dead cross, so the second dead cross point is the higher selling point of the day. This is the combination of the KDJ indicator intraday short cycle. As for when you want to buy at a lower point, just think about it the other way around.
(2) Combination of mid-term KDJ (daily, weekly, monthly)
Like other indicators, in addition to paying attention to the daily line, KDJ should also be combined with the monthly and weekly lines. In many cases, the weekly and monthly lines have already crossed downward, and the medium and long-term trend has gone bad, but the daily line has crossed, which can only be a medium- and short-term head. In actual operation, we should choose the one where the KDJ crosses the daily, weekly and monthly lines at the same time, that is, first find stocks with good medium and long-term trends, and then make short-term swing profits in these stocks.
For the same New Hope stock, from the monthly KDJ line, KDJ was in the golden cross zone from October 31, 2018 to the end of August 2019. Then look at the weekly chart and find the trend after October 31, 2018. You will find that the best operating range is the first and second stages in the weekly chart. The first stage is the double golden cross resonance zone of the monthly and weekly lines, while the second stage is the monthly golden cross, and the weekly high level is passivated, which is a signal that you can continue to hold the stock. Finally, let's look at the daily KDJ. Here we take the KDJ daily chart of the first stage and find that in this stage, either KDJ oscillates in the consolidation zone of 20-60, or it is passivated at a high level in the overbought zone above 80. So if you are a medium- and long-term investor, you can continue to hold the stock and finally reap the full profit of the first stage. If you are a relatively cautious short-term customer, you can also make a short-term band on the daily line based on the crossover of KDJ.
Section 5: Suitability or Disadvantages
1. Easy to passivate at high and low positions
The advantage of KDJ is that the indicator is very sensitive, suitable for short-term operations, and has a relatively high accuracy under normal circumstances. But it is precisely because it is too sensitive that it often sends out buy or sell signals too early, causing people to make operational errors when the market is extremely strong or extremely weak. Simply put, when the market trend is extremely strong, it is easy to be passivated at high levels, and when the trend is extremely weak, it is easy to be passivated at low levels. In the face of these two indicator misunderstandings, we must correctly understand what is passivation and the operating skills after passivation.
2. Not suitable for stocks with small trading volume
For blue chip stocks, KDJ has a high accuracy rate, but for stocks with too small trading volume, such as newly listed small and medium-sized stocks or stocks operating in a low volume state, the former are mostly bullish, while the latter are bearish, both of which lead to inactive trading. For these stocks, KDJ indicator is not very applicable. Because although the KDJ indicator also rises and falls, and the increase seems to be large, in fact, the fluctuation of stock prices at this time is extremely small. In this way, our profit margin is limited, and sometimes there will even be situations that are contrary to the KDJ indicator. Therefore, KDJ is more suitable for those active and high-quality stocks. For unpopular stocks or stocks with long-term small fluctuations, the accuracy is low. We try not to use KDJ, or only use long-term KDJ to assist in observation.
3. Beware of KDJ's "money-scam" phenomenon
Because it can determine the buying and selling points and is relatively sensitive, many people like to use the KDJ indicator. And the hateful main force also takes advantage of these two advantages of the KDJ indicator to manipulate individual stocks to achieve the purpose of "cheating money" by washing the market or cutting leeks. Simply put, the main force pays attention to suppressing the stock price, KDJ quickly crosses the dead cross, and after retail investors sell their chips, the main force quickly pulls up again, and KDJ crosses the dead cross immediately after the golden cross, and then the stock price rises to the limit or rises all the way, and there is no chance for retail investors to enter the market. For example, the Zhongchu shares in the figure below. At this time, in order to avoid making wrong decisions, we'd better combine the trend line to judge. If the stock price is still above the trend line, for example, Zhongchu shares here have not fallen below the intelligent auxiliary line, then it is likely that the main force is washing the market.
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