How to Use Bollinger Bands to Profit from Volatility

Bollinger bands are one of many tools you can use to try to anticipate the future moves of a stock price. One of the best ways to use them is to try to make money off a stock's sideways volatility. Sideways volatility means that the swings in a stock price are wide enough that you can buy low and sell high multiple times within a short period. Here's how to use Bollinger bands to try to anticipate a volatility swing you can profit from.

Step 1

We will be using Yahoo finance, although you can use Google financial tools, or a number of others. They're all free stock tools, and all contain pretty much the same information.

Type "finance.yahoo.com" into the URL and type the ticker symbol for the stock you are looking up into the box beside the "Get Quotes" button. For instance, C is the ticker symbol for Citigroup.

• Step 2

  This will take you to the individual stock's page, where you can view all kinds of information. Click on the chart on the right. This will take you to the one day chart of the stock.

• Step 3

  I usually like to check volatility over one month or three month periods. There are buttons for each under the stock chart labeled 1M and 3M. There's also buttons for year periods as well, if your time frame is longer.

  For the purpose of this example, I'm clicking the 3M button.

• Step 4

  Once you get to the 3M chart, you want to first simply visually note a volatile stock. The ones I'm looking for will exhibit a pattern of at least 5% swings up and down around a central price. Your goal is to buy at the bottom of these swings and sell at the top as many times as you can. But first you must visually note that this pattern is taking place.

• Step 5

  Click on "Technical Indicators" above the chart. You will see a menu drop down with many options, including Bollinger Bands. Click on it, and click Draw.

• Step 6

  This should draw two red lines on the chart which will help you see the pattern of the stock movement through moving average and volatility. Wide bands usually denote a lot of volatility. Skinny bands usually represent an upcoming change in trend. You want wide, skinny, wide, skinny. This means buyers and sellers are fighting each other to decide on the stock's price, and it's volatile within a controlled range.

• Step 7

  Buy low, sell high, and make money. Good luck!