4.11 Using Moving Averages as Dynamic Support and Resistance Levels

Identification of support and resistance dynamically by moving averages.
 
Moving averages may also be used as dynamic indicators of areas of support and resistance. 
 
Why dynamic? That’s because they are floaters, changing along with the change in price. We already know that moving averages are levels that are watched by many traders. That’s why they often act as support or resistance levels depending on the trend. 
 
As moving averages themselves change over time as price changes, these levels of support and resistance also follow in their footsteps – sort of like they’re playing tag! Since these levels are changing all the time, they’re ‘dynamic’. 
 
We can use these floaters in trading. If the trend is up, price will generally be above the moving average. So we buy when the price dips and finds support at the moving average. 
 
Conversely, when the trend is down, you’ll usually find that the price is below the average. So we sell when the price rises up to meet the resistance offered by the moving average.
 
A look at the chart below will make it clear:
 
Dynamic resistance and support levels by simple moving averages.
 
 
The red line represents the moving average. See how during the up trends the price was above the average and below it when price was falling. The circles represent the points of support and resistance at which one could buy or sell and hitch a ride on a nice pip train!
 
The above chart shows a simple moving average being used as dynamic support and resistance level. However, you can choose EMA or WMA as well. Let's have a look on the same Forex chart with an EMA instead of SMA:
 
Support and resistance levels by exponential moving average.
 
Just one thing. The moving average is not perfect, and you can see that many a times the price may go past it before moving back into the main trend. Well, there’s no getting around this – it’s best to think of moving averages as areas rather than precise points, and as always, to have a stop loss in place.
 
In fact, traders keep themselves reminded of this by sometimes using two moving averages instead of just one, and use the area bounded between these two averages as a zone of supply (support) or resistance as the case may be. Check this out in the chart below.
 
Creating support and resistance zones by two moving averages.
 
The faster moving average is colored red and the slower one, blue. See how when the uptrend started the red average crossed above the blue line and remained above it during the trend. The shaded area between the two moving averages is the ‘zone’, and here it is basically functioning as a support area. Note particularly how the price sliced through the red line quite a few times, but was held within the shaded area.
 
Traders stay in a long position so long as this ‘cushion’ is holding, but bail out when price breaks down through it. This happened at the end of the chart with the formation of the long black candle.
 
Once you have chosen one or more moving averages that you find suitable, you can keep your charts set to show them up every time. This way you have a real time guidepost of dynamic support or resistance.
 

Forex Trading Alerts subscription


Name:
Email:
Confirm Email:
9+13

We will send email alerts as soon as the Forex analysis is updated.
Request you to check the Junk (spam mail) folder immediately in case Google group mail is not received in Inbox.

Enter Forexabode Blog

Enter Forex Abode Community

Forex Rates