Dynamic Support and Resistance

Dynamic Support and Resistance

Aside from determining the trend, another use of moving averages is to use them as dynamic support and resistance levels.

We name it dynamic because it is not like the regular horizontal and resistance lines. As the word dynamic suggests, it is constantly changing, reacting to recent price changes.

Traders use these moving averages as support and resistance, that they will buy when price goes down and tests the moving or they will sell as price rises and touches the moving average.

Below is an example of a chart for GBP/USD with 50 Exponential Moving Average:

Dynamic Support and Resistance

From the chart above, we can see that every time the price nears the 50 EMA, it is working as a resistance and the price goes back down.

Note that this doesn’t happen all the time. Sometimes, price may go up your EMA line before it goes back down and follow a trend.

There are even instances that the price will go all the way up, intercepting your EMA line. This is why some traders plot two moving averages. They only buy or sell when price is within the space the two moving averages create.

Here’s an illustration:

the Zone

You can see that the price went above the first EMA line but went down afterwards. During the times the price is inside the two horizontal EMA lines, as we call it “the zone”, this is the best time to buy or sell.

Comments

comments

Powered by Facebook Comments