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Mean reversion
Does a KDJ cross up mean oversold, or does it mean location?
KDJ stochastic · Stochastic / KDJ
What it bets
After the close falls to an extreme spot in the recent high-low range, it will come back toward the middle of that range.
How the rule is written
George Lane's stochastic reads the close as a percent of the distance between the recent high and the recent low. %K is then smoothed into %D. The KDJ form adds a J line beside %K and %D. A cross up while the lines are low leans long, and a cross down while the lines are high leans short. That is the common use. It answers where price sits inside the range, not how fast the rise or the fall is.
When it fails
In a one-way market, price can keep closing at the top of the range, and KDJ stays stuck at a high reading. Crosses up turn into crosses down, and crosses down turn back into crosses up.
Do not confuse it with
RSI uses the size of gains and losses. CCI uses how far price has moved from a typical price. KDJ uses location inside the high-low range. All three can be extreme at once, or only one of them can be.