Chapter 11, Part VII. Dynamic support and resistance.

Part VII. Dynamic support and resistance.

Commander in Pips: Today we will discuss how MAs could be used as support and resistance lines. But they are not static support and resistance, as are lines that we’ve already discussed – rather they are dynamic support and resistance.

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Pipruit: What does it mean – dynamic?​

Commander in Pips: It means that some MA could act as support and/or resistance. But due the fact that its value changes over time, the support and/or resistance level thatis provided by this MA will also drift with it and change in time. Since the MAs value depends on price action, hence support and/or resistance depends on it also. Many traders use this property of MA and act as follows:

1. When price is above MA (trend is bullish) – they will buy when price dips to MA and test its support;

2. When price is below MA (trend is bearish) – they will sell when price pops up to MA and test its resistance;

3. Usually for this purpose longer period MAs are used, with a period above 25. The most common are 50-period and 200-period MAs. But the choice of MA period is very personal and depends on the trading style and strategy of particular trader.

Take a look at the chart – here I’ve plotted a 50x5 DMA. You know that I like displaced MAs. Look, during the uptrend it acts like support, and holds the market every time, when it dips to it. Here you can see what “dynamic” means. When trend changes and price has moved below the MA – it becomes resistance, like a simple line. We’ve discussed this property before.

Chart #1 GBP/USD Weekly and 50x5 DMA
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Pipruit: Yes, I remember that. Cool. But I see, that it doesn’t hold price perfectly – the market has penetrated it sometimes…​

Commander in Pips: You’re right. In fact, our MA has the same properties as a simple support/resistance. Remember, what we’ve said about them? We should treat them not as a precise value, but more like an area. And this area will be wider as we get into longer time frames. This is a weekly chart, so, I think that such penetrations will happen, and that we can see here are admissible.

Pipruit: Oh yes, I’ve a forgotten that bit. Thanks Sir. Also I have another question, Commander. Previously we’ve said that it is possible to use couple of MAs for trend estimation, so, could we use couple of MA somehow? Just to smooth these splashes outside the MA – they put me in a flurry, because you never know – will it be just a fake out or a real breakout.​

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