Moving averages can also be used as dynamic support and resistance levels.
We call it dynamic because it differs from standard horizontal support and resistance lines. They are constantly altering based on current price movements.
Many forex traders regard these moving averages as critical support or resistance levels. When the price drops and tests the moving average, these traders will buy, and when the price rises and touches the moving average, they will sell.
Let’s take a look at the GBP/USD 15-minute chart and highlight the 50 EMA. Let’s see whether it acts as dynamic support or resistance.
It appears to have held up really nicely! Every time the price approached and tested the 50 EMA, it behaved as resistance and the price dropped. Isn’t it amazing?
One thing to remember is that these are just like your standard support and resistance lines.
This indicates that the price will not always perfectly bounce off the moving average. It will occasionally move slightly past it before returning to the trend’s path.
There are also situations when the price will completely surpass it. Some forex traders may place two moving averages on the chart and only buy or sell when the price is in the middle of the space between the two moving averages.
This area could be referred to as “the zone.”
Let’s revisit the GBP/USD 15-minute chart, but this time we’ll use the 10 and 20 EMAs.
According to the chart above, price briefly above the 10 EMA by a few points before dropping.
Some traders utilize intraday tactics similar to this.
The notion is that these moving averages, like your horizontal support and resistance areas, should be considered as zones or areas of interest.
The space between moving averages could be thought of as a zone of support or resistance.
Breaking through Dynamic Support and Resistance
You are now aware that moving averages can serve as both support and resistance. You can make a lovely little zone by combining a couple of them. However, you should be aware that they, like any other support and resistance level, can fail!
Take another look at the 50 EMA on the GBP/USD 15-minute chart.
The 50 EMA held as a powerful resistance level for a time in the chart above, as GBP/USD frequently bounced off it. However, as indicated by the red box, the price eventually broke through and soared higher.
Price then retraced and tested the 50-day exponential moving average (EMA), which proved to be a sturdy support level.
So there you have it, everyone!
Moving averages can also serve as dynamic levels of support and resistance.
The fact that moving averages are constantly changing means that you can just leave them on your chart and not have to continually searching back in time to discover potential support and resistance levels.
You’re aware that the line is most likely a moving point of interest. The only challenge is choose which moving average to use!
Next Lesson: How to Use Moving Average Envelopes