Stochastic Index (KD) in Foreign Exchange Classroom
Stochastic Index (KD) - was invented by George 6.1 Lane many years ago. In recent years, it has been used in both stocks and They are widely used in the futures market and can also be borrowed in the foreign exchange market.
The two lines %K and %D are used on the chart. The design combines some advantages of the momentum concept, relative strength index and moving average. In the calculation process, it mainly studies the high and low prices and closing prices. The relationship between prices, that is, by calculating the true amplitude of price fluctuations such as the highest price, lowest price, and closing price on the day or in recent days, it reflects the strength of the price trend and the phenomenon of overbought and oversold.
The main theoretical basis is: when the price rises, the closing price tends to be close to the upper end of the day's price range; while in a downward trend, the closing price tends to be close to the lower end of the day's price range. As for the %K line and %D line, %D is more important as it mainly provides buying and selling signals.
In the foreign exchange market, before the market trend turns upward, most markets will close at a high price every day, and when they fall, the closing price will often be at a low price. The stochastic index is designed with price fluctuations in mind. The calculation of random amplitudes and medium and short-term fluctuations makes its short-term market measurement function more accurate and effective than the moving average, and it is more sensitive than the relative strength index in terms of short-term overbought and oversold markets.
Therefore, this index plays a huge role in the stock market, futures market, foreign exchange market, including the treasury bond market.
(1) Calculation method (taking 5 days as an example):
%K＝100 X{(C—L5)/(H5—L5)}
< p>%D＝100 X(H3/ L3).C: The closing price of the last day.
H5: The highest price in the last five days.
L5: The lowest price in the last five days.
H3: The sum of the last three (C-L5) numbers.
L3: The sum of the last three (H5-L5) numbers.
The calculation range is 0-100. Simply find the relative position of the day's closing price within the entire price range of the past 5 days. If it exceeds 70, it means that the day's closing price is close to the upper end of the price range. ;If it is lower than 30, it means that the closing price of the day is close to the lower end of the price range.
(2) Application rules:
When the %K value is above 80 and the %D value is above 70, it is the general standard for overbought; when the %K value is below 20, the %D value is Below 30 is the general standard for oversold.
Note: It is called Stochastic in mt4
Sometimes an extra J line is added, called KDJ:
The full name of KDJ is Stochastic, named by George Created by Lane, its comprehensive momentum concept, the advantages of strength indicators and moving averages were applied in futures investment in the early years, and its functions are quite significant. It is currently one of the most commonly used indicators in the stock market.
Principles of buying and selling:
1. The K value crosses the D value from the right downward to sell, and the K value crosses the D value upward from the right to buy.
2. The high-end crosses downward twice in a row to confirm the downward trend. The low-end crosses upward twice to confirm the upward trend.
3.D value＜20% oversold, D value＞80% overbought; J＞100% overbought, J＜10% oversold.
4. When the KD value hovers or crosses around 50%, it is meaningless.
5. Not suitable for stocks that are too speculative.
6. You can observe the deviation between the KD value and the stock price to confirm the high and low points.