Technical Stock-Picking: How to Bet on Bollinger Bands

Using Bollinger Bands to Avoid Big Losses

Bollinger Bands can also be used for stocks in a down trend. Look at a recent one-year chart for Citigroup (C Quote - Cramer on C - Stock Picks):

Click here for larger image.

March through October 2007, Citigroup was generally trading in a narrow range. Suddenly, the bands widened -- indicating increased volatility -- and the price dropped within a month to the low 30s, continuing into the high 20s. A shareholder of Citi who was an attentive chart-reader would have spotted a sell signal in late October -- as the bands widened -- and would have averted a large loss.

Your Bollinger Bands Assignment

This week, your homework assignment is to find the exact time to buy or sell a stock based on its Bollinger Bands.

Step 1. On Stockpickr, create a portfolio called "Bollinger Band Trades: [Your Stockpickr Username]." (To create a portfolio on Stockpickr, you'll need to first log-in. If you're currently not a Stockpickr member, you can register at www.stockpickr.com/register.)

Step 2. Pick five stocks you are interested in buying or selling. Using your favorite charting software (like Yahoo! Finance Charts), plot the stock price and its Bollinger Bands. Plot an intraday or one-day chart of your stocks, with intervals as small as one minute during the day.

Where is each stock trading relative to its Bollinger Bands? Did the price break above or below them?

Use the bands to pick the right time to buy or sell. Check out volume as well -- a move on heavier than average volume makes the buy or sell signal even stronger (see "Technical Stock-Picking: How to Trade Off of a Stock Chart"). Document the times and prices for your trades in Stockpickr's "Reason?" box.

Step 3. Repeat Step 2 for the next three trading days, or until you feel comfortable trading real money (see "Making the Transition from Investor to Trader").

By combining technical trading tools like Bollinger Bands and moving averages, and only acting when you are confident in your decision, you should improve your trading performance.

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