Stock selection for investors by using Bollinger Band

As one of the methods for stock selection, investors can also use fundamentally good stocks, which are, then, traded without any trend.

Stock selection is of crucial importance for investors. Having no proper stock selection process is like skydiving without a parachute. In an ideal scenario, the perfect method of a stock selection would be to identify fundamentally sound companies and then, use tools of technical analysis to time the entry. It can end up giving the most optimised result for the investors, going ahead. 

As one of the methods for stock selection, investors can also use fundamentally good stocks, which are, then, traded without any trend. Whenever a good stock is undergoing consolidation, it usually faces a contraction in volatility. This means that the volatility or the movement in these stocks narrow down a lot. Volatility contraction causes the Bollinger Bands to contract. 

It is assumed that the periods of low volatility are followed by a period of high volatility. One must note that the periods of low volatility provide investors with stocks that are in the consolidation range and in a neutral setup. They can use these periods of low volatility to their advantage. They can create a watch list of fundamentally good stocks with low volatility and Bollinger Band squeeze. Once a breakout appears, investors can buy such stocks as they usually initiate a new and robust trending move. 

Here is an example:

The technical tool that is used to measure periods of low or high volatility is Bollinger Bands. The bands are nothing but the value of two standard deviations placed above and below the 20-period moving average.