Another way to use moving averages is to use them as dynamic support and resistance levels.
We call them dynamic because they are different from ordinary horizontal support and resistance lines. Depending on recent price movements and price action, they are constantly moving.
Many Forex traders consider moving averages as key support or resistance levels. These traders buy or sell when the price falls and touches the level of the moving average, or sell if the price rises and touches the moving average.
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Here’s a look at the 15-minute GBP / USD chart and the 50 EMAs on it. Let’s see if they act as dynamic support or resistance.
Use the moving average as dynamic support and resistance
It really seems to have worked well! Each time the price approached 50 EMA and tested it, the moving average level acted as a resistance and the price fell as it hit. Amazing, isn’t it?
The point to keep in mind is that these are just like your normal lines of support and resistance.
In other words, the price may not always react exactly to the moving average. Sometimes it passes a little and then flows in the direction of the trend. Also, sometimes the whole price goes up explosively.
Use two moving averages as support and resistance areas
What some Forex traders do is use two moving averages and only buy or sell when the price is in the middle of the space between the two moving averages.
You can call this area the “Golden Zone”.
Let’s take another look at the 15-minute GBP / USD chart, but this time we will use the EMA 10 and 20 EMA.
Use the moving average as dynamic support and resistance
In the chart above, you can see that the price slightly (a few pips) crossed the 10 EMA, but then began to fall.
This is how some traders use their day-to-day strategies.
It is assumed that just like normal horizontal support and resistance areas and levels, these moving averages should be treated as areas of traders’ interest.
The area between moving averages can be considered as a support or resistance area.
Failure of dynamic support and resistance
Now you know that moving averages can also potentially act as support and resistance. By combining several of them, you can create a small golden area for yourself.
But you should know that they, like any other level of support and resistance, can be broken!
Let’s take a look at the 50 EMAs in the 15-minute GBP / USD chart
Use the moving average as dynamic support and resistance
In the chart above, we see that 50 EMA has been a strong resistance level for some time. Because GBP / USD has reacted to it repeatedly and has gone lower by hitting it.
However, as we have shown with the red box, the price has finally broken and gone up.
It later re-tested the 50 EMA price, a testament to the claim that this is a strong support level.
In short, you see everything for yourself!
Moving averages can also act as a level of support and dynamic resistance.
An interesting thing about using moving averages is that they are always changing, meaning that you just need to put them on your chart and you do not need to go back in time to keep track of potential support and resistance levels.
You know that a moving average line most likely represents an area of dynamic interest for traders. The only problem is knowing which moving average to use!
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