Dynamic support and resistance is automatically drawn by Moving Averages and it is called this way because it constantly changes, due to the changes in price. If you remember, when we talked about the Moving Averages, I told you that they are calculated by averaging prices for “X” periods. A short period MA will stick closer to price, while a larger period MA will be further away from price, giving it more space to breathe.
The Basics of Dynamic Support and Resistance
Price will more likely go past a short period MA, but a longer period MA will contain it more often. Look at the picture below to see how price went past the yellow 50 EMA, but found good support at the red 150 EMA
When we use MAs as support or resistance, we eliminate the subjective part in drawing S/R levels, but because there are so many choices for the MA type and period, it is hard to choose the perfect one. Different types of market require a different type of MA. The best way to see which one is the best for you is to try different settings. Also, you can use more than one MA on a single chart, giving you different levels of dynamic support and resistance. Generally, shorter period MAs are more useful in higher timeframes while longer period MAs are better suited for smaller timeframes
The steeper the angle of the MA, the stronger the trend is and when it gets flat, we enter a ranging period. If you use two MAs on the chart, when the faster MA is above the slower MA, the market is bullish and when the slower MA is above the faster MA, we are in a bearish market.
Just like in the case of diagonal support and resistance, in an uptrend buy when price touches the dynamic S/R (MA) from above and in a downtrend sell when price touches the MA from below, but be careful about the choice of MAs; remember that a faster MA can be broken while a slower one still holds.