e.g., MACD, KDJ
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MACD (Moving Average Convergence Divergence) is a widely used trend-following momentum indicator in technical analysis, developed by Gerald Appel in the late 1970s. It measures the relationship between two exponential moving averages (EMAs) of an asset’s price, helping traders identify trend direction, momentum shifts, and potential buy/sell signals.
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The KDJ indicator, also known as the Stochastic Oscillator in English financial terminology, is a widely used technical analysis tool designed to identify potential overbought and oversold conditions in a financial asset's price, as well as to spot trend reversals or confirm existing trends. It was developed by George C. Lane in the 1950s and remains a core indicator for traders across markets (stocks, forex, commodities, etc.).
Key Interpretation Rules
Traders use the KDJ indicator primarily for the following signals:
A. Overbought & Oversold Levels
Overbought: When the K and D lines rise above the 80 level. This suggests the asset may be overvalued and a price pullback or reversal to the downside could occur.
Oversold: When the K and D lines fall below the 20 level. This suggests the asset may be undervalued and a price bounce or reversal to the upside could occur.
Note: In strong trending markets, the indicator may stay in overbought/oversold territory for extended periods (e.g., K/D above 80 in a strong uptrend), so these levels should be used with trend confirmation.
B. Crossover Signals
Crossovers between the %K and %D lines are critical for identifying trend shifts:
Bullish Crossover: Occurs when the faster K line crosses above the slower D line, especially when both lines are in the oversold zone (below 20). This signals potential buying opportunities.
Bearish Crossover: Occurs when the faster K line crosses below the slower D line, especially when both lines are in the overbought zone (above 80). This signals potential selling opportunities.
C. Divergence
Divergence between the KDJ indicator and the asset’s price can warn of an impending trend reversal:
Bullish Divergence: The asset’s price makes a lower low, but the KDJ indicator (e.g., D line) makes a higher low. This suggests selling pressure is weakening, and an upward reversal may follow.
Bearish Divergence: The asset’s price makes a higher high, but the KDJ indicator makes a lower high. This suggests buying pressure is weakening, and a downward reversal may follow.