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Yahoo Finance Charts User Guide

Bollinger Bands®

Bollinger Bands® form an envelope that expands and contracts around a simple moving average. The expansion of the bands is based on the volatility of the equity. As the equity becomes more volatile, the bands expand. As the equity becomes less volatile, the bands contract.

The default setting for Bollinger Bands® is 20 and 2, which means the indicator takes the past 20 time periods into account and bases its calculations based on two standard deviations from the mean. You will most likely want to leave the default unchanged when you plot this indicator.

Also, when you plot Bollinger Bands® on your chart, you should also plot a 20-period simple moving average so you can visualize the simple moving average the Bollinger Bands® are interacting with.

Many investors will use Bollinger Bands® to judge the magnitude of a stock movement and identify moments when the trend of the simple moving average may be coming to an end. For example, if you see the two Bollinger Bands® dramatically spread apart and start moving in opposite directions, you know the stock has just made a dramatic move. For a clue as to when that move may end you can keep an eye on the Bollinger band that is moving in the same direction as the price. When this band starts to turn around and converge with the other band—as it did in mid-February on Apple Computers (AAPL)—you know the current price movement is losing momentum.

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