Technical Stock-Picking: How to Bet on Bollinger Bands

This technical-analysis-based assignment was written by Stockpickr member Ira Krakow.

In "Technical Stock-Picking: Get to Know the Moving Average," you can see how moving averages can help you "time" your stock buy or sell decision. But stock technicians don't rely on one arrow in their quiver. This assignment will look at how technicians use Bollinger Bands to spot and ride price trends.

3 Stocks I Saw On TV (Feb. 1)

If you watch Dan Fitzpatrick's "3 Stocks I Saw On TV" videos on TheStreet.com TV or read his technical commentary on RealMoney, then you would know that he's a big fan of Bollinger Bands. Here's why.

A Look at Altria's Chart

The screenshot below is from Fitzpatrick's Jan. 31 video. It's of a weekly three-year chart of Altria (MO), with its Bollinger Bands turned on.

Click here for larger image.

There are three lines (or bands) that overlay the candlestick chart. The Bollinger Bands (developed by John Bollinger) are based on the moving average of the stock (the middle band). In this screenshot, the middle band is the 20-day moving average. The high and low boundaries are then calculated using a mathematical measure of volatility called the standard deviation .

Typically, two sets of standard deviations are used: one with the band above the moving average and one with the band below the moving average. Don't worry about the actual formula. Your charting software will calculate and draw the bands for you. (If you use Yahoo! Finance's chart tool, then under "Technical Indicators," select "Bollinger Bands.")