Another way to use moving averages is to use them as dynamic support and resistance levels.
We like to call it dynamic because it’s not like your traditional horizontal support and resistance lines. They are constantly changing depending on recent price action.
There are many forex traders out there who look at these moving averages as key support or resistance. These traders will buy when price dips and tests the moving average or sell if price rises and touches the moving average.
Here’s a look at the 15-minute chart of GBP/USD and pop on the 50 EMA. Let’s see if it serves as dynamic support or resistance.
It looks like it held really well! Every time price approached 50 EMA and tested it, it acted as resistance and price bounced back down. Amazing, huh?
One thing you should keep in mind is that these are just like your normal support and resistance lines.
This means that price won’t always bounce perfectly from the moving average. Sometimes it will go past it a little bit before heading back in the direction of the trend.
There are also times when price will blast past it altogether. What some forex traders do is that they pop on two moving averages, and only buy or sell once price is in the middle of the space between the two moving averages.
You could call this area “the zone.”
Let’s take another look at that 15-minute chart of GBP/USD, but this time let’s use the 10 and 20 EMAs.
From the chart above, you see that price went slightly past the 10 EMA a few pips, but proceeded to drop afterwards.
There are some traders who use intraday strategies just like this.
The idea is that just like your horizontal support and resistance areas, these moving averages should be treated like zones or areas of interest.
The area between moving averages could considered as a zone of support or resistance.
Now you know that moving averages can potentially act as support and resistance. Combining a couple of them, you can have yourself a nice little zone.
But you should also know that they can break, just like any support and resistance level!
Let’s take another look at the 50 EMA on GBP/USD’s 15-min chart.
In the chart above, we see that the 50 EMA held as a strong resistance level for a while as GBP/USD repeatedly bounced off it.
However, as we’ve highlighted with the red box, price finally broke through and shot up.
Price then retraced and tested the 50 EMA again, which proved to be a strong support level.
So there you have it folks!
Moving averages can also act as dynamic support and resistance levels.
One nice thing about using moving averages is that they’re always changing, which means that you can just leave it on your chart and don’t have to keep looking back in time to spot potential support and resistance levels.
You know that the line most likely represent a moving area of interest. The only problem of course is figuring out which moving average to use!