Forex technical analysis indicators: use the moving average to find dynamic support resistance
Another way to use moving averages is to use them as dynamic support and resistance levels.
We call it dynamic support and resistance because moving averages are not like traditional horizontal support and resistance lines. Dynamic support and resistance continue to change with recent price fluctuations.
There are many traders who regard the moving average as a key support or resistance. When the price goes lower and tests the moving average, they will buy; or when the price goes higher and test the moving average, they will sell.
The chart below is a 15-minute chart of GBP/USD. The moving average is 50 EMA. Let us look at the situation when the moving average is used as dynamic support and resistance.
It looks like the GBP/USD is well below the moving average. Every time the exchange rate touches the 50 EMA and tests the line, the line plays a role of resistance, and then the exchange rate begins to fall. It looks very magical, right?
One thing you should know is that moving averages are like the support and resistance lines we usually use.
This means that the price does not always rebound perfectly from the moving average. Sometimes, the price will cross the moving average slightly and then start to turn.
There are also times when the price will completely cross a certain moving average. Some traders use two moving averages, they will only buy or sell in the middle of the two moving averages.
Let’s look at another 15-minute chart of GBP/USD, but this time we use 10 and 20 EMA.
As you can see from the chart above, the exchange rate slightly crossed the 10 EMA, but then it continued to fall.
Some traders use this method for intraday trading strategies. The point is that moving averages are like horizontal support and resistance areas, and the area between these moving averages should also be used as support and resistance areas.
Breakthrough in dynamic support and resistance.
Now you know that moving averages can serve as potential support and resistance. By combining them, you can get a good trading range. However, you should also know that they can also be broken, just like any support and resistance levels.
Let us look at the trend of 50 EMA on the GBP/USD 15-minute chart again.
As shown in the chart above, the 50 EMA remained stable as a strong support in a short period of time, and the exchange rate fell after initially testing the resistance of the line.
However, as shown by the red box area in the figure, the exchange rate finally broke the 50 EMA resistance and further attacked. The price then tested the 50 EMA again, but this time it exists as a strong support.
Moving averages can also play a role of dynamic resistance and support.
One thing to remember when using moving averages is that they are always changing. The only problem is to indicate which moving average to use.