Among the many technical trading tools available today, one that you should be familiar with is known as the Bollinger Band. To the untrained eye they appear to be nothing short of two lines that simply hug the price of a stock. Boys are these investors dead wrong…

Although these general observations are true, there are a few rules of thumb that you need to be aware of when using this powerful indicator:

· Bollinger Bands help define periods of contraction (bands come closer together) and expansion (bands split apart)
· Equities do not like to trade outside the bands
· A stock will often bounce back and forth between the bands, offering many profitable trading setups

In looking at the Consumer Discretionary Select Spider Fund (XLY:AMEX), you can see how each of the points mentioned above are reflected in the chart below.

Did you notice at the beginning of this chart where the equity ran from one band to the other? We’re looking at a move that could have netted you at least $12 on the trade, running from around $21 to $33 in about a year. The good news is that you can use these bands on any timeframe. So, if you don’t feel like waiting for an entire year for profits, switch to a one-year weekly chart, or for the more aggressive trader, look to the 10-day hourly.

Following this initial run you can see a period where this play traded in a sideways fashion. Once the bands began to contract and come together, this was your hint to take profits. Who on earth would want to stay in a position that is not really going anywhere?

Certainly not me!

I think you’ll agree that time is money, especially in these markets where opportunities are around every corner. This is another added benefit that Bollinger Bands bring to the table. Armed with a new set of perspectives, I’d encourage you to try this indicator and see if it could be another tool in your trading arsenal.