M
oving averages can stop surprising you with their functionality.
It is like having a cleaning robot in your home.
It does everything for you if you place it in the right place in the house.
So, you could use MA as dynamic support and resistance levels, as well.
They are called dynamic, because they are not steady horizontal support and resistance lines, but rather changing depending on recent price action.
Many traders look at these moving averages as key support or resistance and they will buy when the price dips and reaches the moving average or sell if the price rises and touches the moving average.
Let’s take as an example a 15-minute chart of GBP/USD and place 50 EMA.
Can you believe what you see? The price touched the 50 EMA not once, but a couple of times and every time it held as resistance.
Sometimes, the price will not bounce immediately after touching the MA, but it will rather cross it for a bit and then it will go back to the direction of the trend.
Keep in mind that the price could also reverse its initial direction and continue its move after breaking these levels instead of bouncing back.
What can you do to prevent some potential losses?
You could place two moving averages on your chart and when the price happens to be in the middle of the space between the two moving averages, then you can go short or long.
This area is known as “the zone.”
Let’s try it out and place 10 and 20 EMAs on our 15-minute chart of GBP/USD.
You can notice that the price went slightly past the 10 EMA a couple of times, but then it dropped every time it entered this zone between 10 EMA and 20 EMA.
This is how you can use these moving averages as areas of interest and the zone between these moving averages could be considered as a zone of support or resistance.
Breaking through Dynamic Support and Resistance
As with any other technical indicator, sometimes it fails to predict the future move of the price.
The MA and this zone between them are no different from the traditional support and resistance levels because there is no guarantee that they won’t break as well.
Look again at our 50 EMA on GBP/USD’s 15-min chart.
At first look, our 50 EMA held as a strong resistance level, because the GBP/USD bounced off it a couple of times. You could have thought that it will continue to hold the price. But you would have been wrong.
The price eventually broke this level.
It bounced again and tested the 50 EMA, but this time as a support level.
So, the Moving averages, which initially acted as resistance, turned into support.
One of the biggest advantages is that you don’t need to trace the history of MA as support and resistance levels or collect data on how they acted in the past because they are constantly changing.
Remember, they represent a moving area of interest not a certain support or resistance level.
With practice, you will get used to the MAs and how they act in order to choose which one to use.
