What is Dynamic Support and Resistance?
We know about support and resistance as horizontal lines or diagonal trend lines, but the idea of dynamic support and resistance is different. In fact, it’s a discipline all its own!
The main difference between dynamic support and resistance and standard support and resistance levels is that they are constantly changing with price action. Basically, as price moves, so do dynamic support and resistance levels. This is especially applicable to products that are consistently volatile and active.
HOW TO USE MOVING AVERAGE AS DYNAMIC SUPPORT & RESISTANCE.
Moving average support and resistance isn’t as powerful as horizontal levels, but when you combine it with other indicators, the result is magical.
The fact that most traders use these Moving Averages to trade, it means most traders are watching these levels. Why? because they believe in them.
What happens is, that price also starts to respect these Moving Averages and it becomes a self fulfilling prophesy.
From the above AUDUSD, Daily forex Chart;
For Up trend,
Price paves above the Moving Average. As price dips and tests the Moving Average several times, it finds support at the Moving Average. So we can buy on a bounce of prices from the moving average.
If it is a Down trend,
Price will pave below the moving average. As price rises and touches the Moving Average, it finds resistance so we can sell as price fall off the moving average.
Though the Moving Averages are not as perfect as the normal support and resistance, they behave the same way.
MOVING AVERAGE AS A DYNAMIC RESISTANCE
When price holds below the Moving Average several times , it shows high selling pressure in the market. Therefore, price finds it hard to breakthrough.
The sellers are stronger than buyers.
Mean while, the Moving Average above the price becomes a resistance.
Price is likely to bounce back on moving average resistance hence giving a sell signal.
When this happens, you can trigger out your sell position at the pull back/ or bounce holding other factors constant.
On contrary, price will not always hold at these levels all the time. So it is not a must that price will always pull back at resistance. A price break can also happen.
Like the normal horizontal or diagonal resistance, you can choose to sell at price bounce or buy on breakout.
How Do Dynamic Support and Resistance Levels Form on a Chart?
One of the great things about being a modern trader is that our software trading platforms make technical analysis a breeze. All we have to do is select our indicator, define the parameters, and viola – instant analysis!
Dynamic levels are no different; select an indicator, define its inputs and apply it to price action. Here we have a daily forex market EUR/USD chart and we’ve popped on the 10-period exponential moving average (EMA). Let’s see if it serves as dynamic support or resistance.
As you can see, the 10 EMA resistance level held really well for most of the downtrend. Almost every time price approached the 10 EMA and tested it, it acted as resistance and the price bounced back down. Pretty amazing, huh?
Of course, no indicator is infallible, not even the exponential moving average. There was a point in mid-September when the price broke quite significantly above the line. This was a fairly large fake-out as the downtrend continued towards the end of the month and into October. In this instance, the 10 EMA failed as horizontal support and resumed its role as a dynamic resistance.
As a general market commentary, the price will not always immediately bounce off a moving average that is set up as dynamic support or dynamic resistance. Sometimes it will go a little more before returning to the direction of the main trend. In other cases, the price smashes
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