A successful trader should be able to determine periods of increased volatility. Experienced experts can accurately identify volatility at a glance at the chart, but most traders use additional tools. One of such tools is the KDJ indicator.
How to calculate volatile markets
Any asset has periods of high and low volatility. Dozens of factors influence this indicator. The most important of them are:
- Day of the week;
- Market liquidity;
- Historical volatility;
- Change of technical levels;
- Economic and political situation in the country.
Impact on the volatility of the asset is impossible. You can only recognize the state of the market and decide whether to trade or not. You do not have to understand the reasons for the asset’s volatility – it’s enough to know how such markets behave.
The KJD indicator helps to cope precisely with this task. After activating the tool, you will see three curves below the graph. The first curve shows the movement of the price, and the second and the third – the expectation of the trend, related to oversold (Oversold) and overbought (asset). If all three lines lie in the same plane with minor deviations, then the market phenomenon is not volatile (see screenshot).
If you see significant deviations from the trend, and the actual and expected peaks don’t coincide, then the market has high volatility. In the screenshots, the trend waiting curve is highlighted in blue.
How to trade using the KDJ indicator
The choice of the duration of the transaction must be done with an eye on the degree of deviations between the lines. The stronger the deviation is, the longer is the expiration periods. Assets with high volatility should be ignored, because, as can be seen in the screenshot, the waiting curve on such assets behaves unpredictably – the actual and expected peaks almost never coincide.
To trade using the indicator, activate it with the standard settings. The importance of oversold lines and overbought can be changed according to the nature of your trade. If you trade aggressively, the value of “Overboutht Line” can be increased, and “Overboutht Line” can be reduced. This way you increase the number of signals, but lower the accuracy of your forecasts.
You should pay attention to the blue (you can change the color, but initially the line is blue) line. Keep track of the peak. When the chart in volatile markets enters the peak of the trend, and the blue line rises above the actual price (yellow line) – this is a signal that the direction of the trend will be changed. Accordingly, in this period you should make forecasts for the fall or growth (depending on the direction of the peak), until the blue line again will not exceed the boundaries of the new peak.
This is clearly seen in the screenshot. When the line remains within the boundaries of the previous trend, there is no reversal, even when there is a high probability of its occurrence. If a trader started from the standard models of determining the trend peaks, he would activate the option and merge the deal. The KDJ doesn’t do this.
Whereas in the markets with high volatility, the blue trend line and the actual price line are almost not tied to each other. The overall dynamics is preserved, but you can’t make accurate forecasts based on very vague signals. Therefore, the indicator isn’t suitable for high volatile markets.
Tips for increasing forecast accuracy
The KDJ indicator is combined with most tools that are designed to analyze trend oscillations. You can use indicators such as RSI, ATR, Alligator. The KDJ and Fractal bundle works well. You can also use the tool to strengthen various trading strategies.
You should pay attention to the false operation of the indicator. Even in stable markets, there are times when the waiting line goes beyond the peak, but there is no change in the direction of the trend. If you notice this situation, just wind the graph back and look at the dynamics.
Most likely the trend is changing with a slight delay. You need to adjust the expiration period in view of this delay. Observe the chart and determine after what time the trend changes direction. If you consider the probability of false signals, and also use additional indicators, you can raise the number of successful transactions to 70-80% of the total.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future
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