Whether you trade forex or stake your interest in the stock market, It is pertinent to make appropriate trading decisions to remain profitable. Besides a good trading platform, a set of valuable indicators are crucial for your success. Undoubtedly, indicators help you read a trading chart and understand if the market ranges or follows a trend. Technical indicators also assist clients in identifying when an asset is overbought, oversold or due for a reversal. In this piece, we discuss one of the popular technical indicators (KDJ) indicator in detail.
What Is KDJ Indicator?
KDJ is a technical indicator that helps traders to forecast stock trends and changes in their price patterns. It is sometimes also referred to as a random index. Mostly, traders use it to perform short term trend analysis. Besides assisting you to identify trend direction, it also helps you find optimal entry points.
Image Source: https://www.mql5.com
Besides comprising three lines K, D, and J, the KDJ indicator has two price levels: the highest and the lowest. For period calculation, the indicator incorporates both price levels besides accounting for the amplitude of fluctuations in the prices. Hence the indicator is believed to reflect price fluctuations reasonably well. In the KDJ index, the fastest index is K in yellow, the slowest is D in blue, and J is the medium index with a red line.
KDJ index values range between 0-100 for K and D, while the value for J can be less than 0 or more than 100. However, the software incorporates KDJ values between 0 and 100 for research and analysis.
The value for J is more sensitive than K, with D being the least sensitive. On the other hand, D possesses more stability while K and J values rank at 1 and 2, indicating the latter being less stable.
With the KDJ indicator, investors mainly try to understand the relationship between an underlying asset’s highest, lowest, and closing prices. It also employs some merits of strength indicator, momentum concept, and the moving average. Therefore, it becomes pretty easy to judge the market conditions using the KDJ indicator.
How Does It Work?
KDJ indicator is all about identifying random price fluctuations and works best for short and medium-term analysis in a trending market. However, the K-line chart also predicts the price trend pretty well in a more extended time frame. For instance, on the weekly chart, the KDJ indicator’s mid-line operation works much better.
While the K and D lines look similar to the lines used in the Stochastic Oscillator, the J-line reflects the bifurcation of the D’s value from K. When these lines converge, you can anticipate a new trading opportunity.
How to Setup the KDJ indicator?
The KDJ Indicator is a technical indicator that transforms historical data. With KDJ, traders can detect hidden patterns and peculiarities in price dynamics that a human eye could hardly see. Traders must adjust their strategy based on the information acquired from the KDJ indicator.
Given below are the simple steps to help you set up the indicator.
Download the KDJ MT4/MT5 Indicator on your PC. You can easily find it over the internet.
After installing it, sign in to the MetaTrader platform and open the data folder by clicking on the file menu.
Access the MQL4 folder and paste it into the indicators folder.
Restart the Metatrader 4/5 Client.
Choose a chart and timeframe to test the KDJ indicator.
How to trade using the KDJ indicator?
With KDJ indicators, traders mainly look for buy and sell signals. Based on the values of the KDJ indicator, there are three different zones, including oversold, overbought, and wandering zone.
When the value of KDJ decreases below 20, they fall in an oversold area. Similarly, values exceeding 80 hit the overbought zone.
KDJ indicator generates a sell signal when the three lines intersect above an overbought level. In such a scenario, the blue line remains on top while the yellow line comes in the center, and the red one stays on the bottom. Similarly, a buy signal is received when all three lines coincide below an oversold level following the same sequence.
Not to mention, when the values for the KDJ indicator hover between 20 and 80, you should wait for the confirmation signal.
Levels being overbought and oversold indicate reversal points. While these levels have a default value of 80 and 20, you can tweak them for more sensitivity to get a fair indication.
Things To Consider While Trading With KDJ Indicator
It is best to use the KDJ indicator with other indicators, such as the Average True Range (ATR) and Average Directional Index (ADX).
The Average Directional Index (ADX) indicates a possible trend reversal. Since KDJ is less likely to work under extremely volatile markets, ATR can help you determine the market’s volatility with some reasonable assurance.
Remember, indicators can only help you find a possible value and don’t offer 100 percent confirmation. Therefore, it is crucial to employ an appropriate capital injection followed by advanced risk management tools.
Pros and Cons of KDJ Indicator
Like other indicators, KDJ also has some pros and cons that are listed below.
KDJ indicator is simple to understand and easy to interpret
It works best when used with other indicators, such as Stochastic Oscillators.
It is ideal for identifying changes in price trends and finding optimal entry points.
KDJ indicator doesn’t work in a highly volatile market.
It sometimes offers misleading information.
Undoubtedly, the KDJ indicator is pretty helpful to determine price trends and identify entry points. However, the indicator can sometimes lead to false information like other technical indicators; hence shouldn’t be relied upon in absolute terms. It is better to use it with other technical indicators to form a more reasonable trading decision.
What is Gravestone Doji and How to Trade using this Reversal Candle Pattern?
Candlestick patterns hold critical importance in technical analysis, and understanding them well is crucial. While there are more than 30 candlestick patterns, Doji candlestick patterns are known to be used more frequently. However, traders usually struggle to employ them effectively either due to lack of knowledge or misinterpretation. In this guide, we’ll discuss one of the popular candlestick patterns – Gravestone Doji. Besides helping you know how it works, we’ll also explain how to interpret it. In the last section, we’ll also discuss some limitations of the Gravestone Doji pattern.
What Is Gravestone Doji?
Gravestone Doji is a bearish pattern that indicates a price reversal and a subsequent downtrend. It alerts traders to book a profit on the bullish positions before the trend turns bearish. The pattern forms when the underlying asset’s opening and closing price becomes equal. It has a long shadow on the upper side that indicates sellers resisted the day’s buying pressure and that supply and demand are in equilibrium.
What does a Gravestone Doji indicate?
A Gravestone Doji pattern indicates the bearish reversal. The pattern does not necessarily need opening, closing, or low prices to be the same for its validation. However, Gravestone Doji’s small tail help traders not to confuse it with other patterns like the inverted hammer, spinning top, or shooting star. The market portrays that the bulls push the prices to go higher, while bears keep pulling the prices back to the origin.
Gravestone Doji’s upper long shadow implies the bulls are becoming weak. Not to mention, the Gravestone Doji can appear near a downtrend end, but it is more common in an uptrend. Despite being famous, the Gravestone Doji comes with reliability concerns as is common with other visual patterns as well. Traders often ignore Gravestone Dojis until the confirmation candle shows up and signals a reversal.
Gravestone Doji examples
Gravestone Doji can appear in both uptrend or downtrend. Let us explain either case using a simple example.
Gravestone Doji in Uptrend
Gravestone Doji is more likely to be formed in an Uptrend top. When it appears in an uptrend, it is considered unfavourable for the bullish market. That’s because it suggests the bulls are becoming weaker, and the bears are likely to come into play who will start pulling the price downward. Ideally, when a Gravestone Doji appears at the top of an uptrend, you should get ready to exit a trade before it is too late and the bears take control.
Gravestone Doji in Downtrend
Whether a Gravestone Doji appears in an uptrend or downtrend, it is always a bearish candlestick pattern. Therefore, you must not get confused. The appearance of a Gravestone Doji in a downtrend suggests that a trend might continue or move sideways and market range. Remember, a Gravestone Doji in a downtrend shouldn’t be considered a bottom confirmation since the market may continue descending further.
Trading the Gravestone Doji
How to trade Gravestone Doji?
Always consider trading Gravestone Doji for some confluent reasons. Although candlestick analysis is a powerful tool for effective trading, it works best when combined with other indicators, such as Fibonacci levels, moving averages, horizontal support and resistance, momentum analysis with RSI, MACD, and CMF, etc.
After identifying a Gravestone Doji, wait for the confirmation candle and the low of Gravestone Doji to break down. The simple method to trade Gravestone Doji is to enter a short-term position. Remember, you should initiate a trade only when the low of Gravestone Doji breaks since if it keeps holding there, the market might start rising further.
Managing risk while trading with Gravestone Doji
Do not forget to place a stop loss while entering a position based on Gravestone Doji. It will help you limit your loss if the market moves against you. It is best to place a stop loss a little higher than the shadow of the Gravestone Doji. Not to mention, your risk levels may vary depending upon the wick size of the Gravestone Doji. It could either be too small or too large for you to be comfortable.
Essentially, placing a tight stop-loss could get caught by stop hunters, while a stop-loss set too far brings more risk. Therefore, you can use volume profiling to identify the appropriate stop-loss point.
Setting up target profits while trading with Gravestone Doji
While appropriate timing holds critical importance for trade placement, you are less likely to be profitable if you miss an exit plan for your positions.
When trading with Gravestone Doji, it is best to use the candle wick to exit a position. Your first target profit should be equal to the size of the Gravestone Doji candle, while you can have it double the size of the candle for the second take profit.
Drawing Fibonacci levels to match the appropriate potential spot or incorporating support and resistance levels can also help. Moreover, you can employ other methods like TD sequential or Elliott wave and use their exit points in conjunction with the Gravestone Doji to have the best results.
Setting up a Stop loss on Continuing Trades
There could be a scenario where the market seems to be moving well in your favour, and you wish to switch from scalping to a long-term position. In such a case, you need to recalculate your stop level and place it a little lower or higher than your current stop level so you can avoid losing profits. However, modifying a stop-loss in continuing trade is not recommended. It can have serious consequences in highly volatile markets like cryptocurrency. If you are new to trading, it’s better not to think about it.
Difference between Gravestone Doji & Dragonfly Doji
Dragonfly Doji is the inverse of Gravestone Doji. Despite their differences, they have a common mechanism. An almost-identical closing, opening, or high of a trading session creates a Doji. While Gravestone Doji looks like an inverted T, the Dragonfly Dogi looks similar to a “T.”
Both can be bullish or bearish, but they can also be the opposite. A bullish dragonfly can precede an upswing, whereas a Gravestone Doji can precede a downturn. Both patterns necessitate volume and a second candle. Instead of pure bearish or bullish signals, you should consider both formations as visually uncertain representations.
Double Gravestone Doji
The appearance of a double Gravestone Doji indicates that bulls are significantly weak, and the market is turning bearish. After a low of two Gravestone Doji breaks, the market descends abruptly. However, instead of entirely depending on the Gravestone Doji, you should consider using other indicators such as RSI, MACD, Bollinger bands, Fibonacci levels, and Moving Averages, etc., in conjunction with the Double Gravestone Doji. It will help you decide more precisely whether to exit a trade in anticipation of a bearish market ahead or wait for bulls to retreat. Not to mention, the significance of the confirmation candle can’t be overlooked either.
Characteristics of the Gravestone Doji
Gravestone Doji pattern is one of four Doji candlestick patterns, including Common Doji, Gravestone Doji, Dragonfly Doji, and Long-Legged Doji. Being visually different to other candlestick patterns, it is easily identifiable.
Gravestone Doji’s most distinguishing characteristic is the long upper and lower wick with a tiny candle’s body that looks representing the open and closing prices being almost the same.
When a Gravestone Doji appears at the end of a strong uptrend, it becomes compelling. Generally, you may notice intense price action bursts pushing the price of underlying security into the uptrend. These uptrends are likely to have no pullbacks.
The Gravestone Doji suggests a temporary pause or even a possible reversal if such a trend appears. Undoubtedly, the emergence of a Gravestone Doji near a rally’s top-end or close to a resistance level makes it more viable. Not to mention, the Gravestone Doji can appear in either case.
Significance of Gravestone Doji’s Location
Remember, the location of the formation of Gravestone Doji is critically essential. A Gravestone Doji appearing on a dominant resistance level is far more significant than the pattern emerging on the chart anywhere else. Therefore you should avoid trading Gravestone Doji unless it appears in the position mentioned above. For instance, amongst the two Gravestone Doji appearing in the image shared below, the 2nd Gravestone Doji holds more significance since it forms on precise resistance levels. On the other hand, the Gravestone Doji appearing in the middle of the chart doesn’t make any sense. Hence, if you had to place a sell trade, you would have certainly put it near the second Gravestone Doji.
How to Trade Gravestone Doji In a Range Market?
Since possible selling pressure comes around a resistance level, you should short your position. That’s because the market signals the rejection of higher prices and indicates a lower reversal, just like shown in the image below.
How to Trade Gravestone Doji In a Trending Market?
The market usually bounces off in a healthy or strong trending market. Therefore, you should consider going short when the price of an underlying asset pulls back towards the Moving Average forming a Gravestone Doji, as you can see in the attached image.
Gravestone Doji – Limitations
Gravestone Doji candlestick in an uptrend may signal the end of a bullish phase and the beginning of bearish forces. It can help traders to plan for getting out of trades with profit. However, it doesn’t necessarily mean that a trend has changed. Traders must wait for the next candle to form before making a move. It can easily represent market indecision, and then the market can rise. The Gravestone Doji works best when combined with other technical indicators.
Pros and Cons of Gravestone Doji
Given below are some pros and cons of employing Gravestone Doji;
Gravestone Doji is easily identifiable.
It is one of the powerful bearish reversal candlestick patterns.
Traders can use it in conjunction with other indicators.
It can form a mid-trend becoming least helpful.
It usually does not appear in high time frames.
It shows the market fluctuations and could continue the trend or gets a reversal.
Let’s review how you can identify and trade the Gravestone Doji using quick bullet points:
1) An upward trending Gravestone Doji pattern usually occurs at the bullish trend’s peak.
2) The bulls drive the security to an indefensible level, that the bears take control. Traders say this pattern resembles a bull gravestone’s side profile.
3) You should sell the stock after a candle gets closed below the Gravestone Doji’s tiny body.
4) Never trade gravestone Doji without a stop loss. Also, it would be better to place the stop-loss above a candlestick’s peak.
5) When trading the Gravestone Doji, you have 02 profit targets. For larger Gravestone Doji candles, allow the price to become equal to the formation size. Secondly, targeting profits twice the Gravestone Doji’s size works better with a smaller Doji candle.
6) If the market continues to trend in your favour, be patient. Set your stop beyond the target. Keep trading until two bullish candles appear. This suggests the bearish move is over.
Undoubtedly, Doji candlesticks are the most common reversal patterns, and the Gravestone Doji is one of their variations. When identified and confirmed appropriately, Gravestone Doji can lead traders to explore profitable opportunities. However, as with any other strategy or pattern, it takes time to master it. It is best to practice it well using a simulator before staking your funds in a live market. Follow the guide and test your trading skills with Gravestone Doji as many times as you can. Once you have become confident to go live, the market is yours.
Gravestone Doji doesn’t reflect profitable opportunities always. Despite indicating a price trend reversal reasonably well, it still needs to be used carefully. Remember, do not make conclusive decisions based on Gravestone Doji alone. Instead, it is best to use it in conjunction with other tools and indicators. There are plenty of tools available to help you make your way to profitable trading. Since now you’ve become familiar with Gravestone Doji, identifying it and placing trades shouldn’t be a problem for you. However, we understand that trading knowledge is not always the major constraint for most traders. Instead, It could be financial stress that stops you from achieving your goals. If that’s the case, you don’t need to be worried. At Traders Central, we do have the funding solution for serious traders. Besides an instant funding facility, we offer flexible payment plans with one time fee subscriptions. Not to mention, we do allow leverage trading as well.