Support and Resistance Part 2
[00:12] – Video 10 Support and Resistance Part 2. As mentioned in our previous video, Supports and Resistance are zones within financial markets where price could reverse. In my previous video, I talked about Horizontal Support and Resistance and gave some examples on real life price charts of Horizontal Support and Resistance. In this video, I will teach about Dynamic Support and Resistance, which personally is my favorite support and resistance concepts, and is the type of support and resistance which I use in my own personal trading.
[00:54] – I used this illustration in my previous video to demonstrate Resistance becoming Supports or Supports becoming Resistance when Support and Resistance is broken. In Dynamic Support and Resistance, the concept is the same. When a dynamic support is broken it can be called as a dynamic resistance, and when a dynamic resistance is broken it can be called as a dynamic support. So what is Dynamic Support and Resistance?
[01:28] – Unlike Horizontal Support and Resistance, which is a horizontal line across the charts, Dynamic Support and Resistance is created by moving averages. If you are brand new to the moving averages, I will suggest you just pause this video and go and watch Video Number 13, then come back to this video.
As I was teaching about moving averages in that video, the illustration on this slide has a moving average. Each time price reaches its moving average, it is rejected. We have a dynamic support created by this moving average. If price was below the moving average, the moving average could act as a dynamic resistance. And as always I will give you some real life examples of this on price charts.
[02:24] – This is a daily chart of a Euro USD. And on this chart I am going to show you the power of Dynamic Support and Resistance. The most popular moving averages for dynamic support and resistance are 21, 50, 100, and 200. Let bring up a 100 moving average. On the chart, we have a 100 moving average, and you should notice very quickly that when price reaches this moving average, the price is rejected. This moving average is acting as a support, which we will refer as dynamic support.
Price pushes on the upside; it pulls back; reaches the moving average; and is rejected. Price pulls back again; reaches the moving average again; and is rejected.
So why does this work; why does having a moving average reject price? It is purely self-fulfilling. Many professional traders use moving averages for dynamic support and resistance that is self-fulfilling. People are buying at this levels, which pushes the price up. Let us look at an hourly chart of the Euro US Dollar.
[04:03] – This is a one hour chart of the Euro USD and I have a moving average set in the period of 50. Price moves on the downside, and reaches the moving average area; and price is rejected and goes on the upside. The moving average is acting as a dynamic support.
When the price comes down the second time, we have this big Pin Bar. And by a strike reject price, it comes up here but unfortunately it fails and the dynamic support is broken. What is interesting is that our dynamic support now becomes dynamic resistance – just like our Horizontal Support and Resistance, where ceiling becomes floors and floors become ceiling.
A dynamic support and resistance works by the same concept. The dynamic support is broken; the price comes up and tests the new support and resistance; the price is rejected and moves on the downside. Once again the moving average is broken. The Resistance has now once again became Support. When price comes back to the support level, it is rejected. Price reverses on moving average is acting as a dynamic support. Now how can we trade in Dynamic Support and Resistance?
In our previous video, I mentioned that Pin Bars and Engulfing Candles are grow signals to trade areas of support and resistance. You will notice that we have Engulfing Candle here; if we went short, we could have profited as the price went on the downside.
When our moving average is acting as a dynamic support, we have a Pin Bar here and Engulfing Candle here. And other signals, we could have taken to carry a long, and price then went on the upside.
[06:51] – In summary, a Dynamic Support and Resistance is created by moving averages. The most popular moving averages for dynamic support and resistance are moving averages set in the period of 21, 50, 100 and 200.
Our next video is Support and Resistance Part 3. As always, thank you for watching this video. Please watch more and please check out our website ForexMinute.com