How is it possible to use Bollinger Bands in CFD trading?

[Mary S]

Hello, help me understand how I can use Bollinger Bands in CFD trading.

[Danitah J]

Hi Mary,

Bollinger Bands help to determine the price levels comparatively. They are tools that depend on market standards to help study the market pattern and come up with precise trading techniques.

Bollinger Band acts as a technical analysis indicator, and it is made up of three lines. It measures the moving average for 20 days of the final market price. Lines of equal distance are drawn on each side in the moving average.  The length of these lines shows the price volatility.

The sidelines may approach or drift from each other, depending on how the price changes. For example, When the price is rising, it will go after the upper band and touch it.

While using a Bollinger Band, you should watch the price movements at the perimeter and confirm if the trend continues and check for an interchange in the sides to decide on changing the direction.

To protect you from the risk of getting a margin call while trading in CFDs, you must use other measures that seem to support the price movements. Such a change may occur when the price fluctuates and comes back with more bars.

[Chrispus]

Hi Mary,

Bollinger Bands use past data to determine market direction, volatility, consolidation periods, and potential trend break-outs and continuations. The fact that it measures market momentum and changes its shape according to recent price action gives it an edge over standard indicators.
It forms three lines. Marking the top end of the estimated range, the upper line serves as resistance. It’s derived from doubling the standard deviation and adding it to the moving average. Conversely, the lower band marks the bottom of the estimated range and acts as a support. It’s calculated by doubling the standard deviation and subtracting the result from the moving average.
Likewise, the middle band is an extra barrier working as resistance for trades above it and support for trades below it. It’s determined by adding the closing values of the past 20 periods and dividing the answer by 20. This indicator is not only useful for avoiding risky trades but also finding new opportunities.
 

Edited June 18, 2020 by Chrispus

[Volkan Kirkar]

Hi Mary,

A trading plan that utilizes Bollinger Bands for trading CFDs should monitor price that moves along the border for trend confirmation, and keep an eye on a crossing from one side to the other to indicate a price reversal. 

Sometimes the price will swing across before reverting back in several more bars - this is known as a ‘head fake’. To protect yourself from overreacting and risking getting a margin call on your trades, make sure you’re also monitoring other indicators and see if they’re supporting the price movements. Reliable indicators to confirm trends are the Relative Strength Index (RSI) and the Moving Average Convergence/Divergence (MACD) because these are momentum indicators and thus are complementary to the Bollinger Bands which are based solely on the price levels.