Moving averages could also be used as dynamic support or resistance levels, especially the most popular ones like the 200 period or the 55 period moving averages. In the currency markets the Exponential Moving Average or EMA is preferred or more commonly used than the Simple Moving Average, because the EMA reacts more rapidly to price changes. The 200 and 55 EMA have a higher chance of acting as support or resistance on the higher timeframes like the 4 hour chart or the daily chart.
Precisely, on the daily chart of the EUR/AUD, courtesy of the Forex Broker ActivTrades http://www.activtrades.co.uk/, we can see that when the price has visited the 200 Day EMA (blue line), it has bounced to the downside, indicating that the moving average has been acting as a very good resistance for the pair. On the last bounce that the price made from the 200 EMA to the downside, it went to the 55 EMA (purple line), but it is currently trying to stall there.
When the price gets boxed between the 200 EMA and the 55 EMA, we call that “the sandwich”. From this point on the price may stay consolidated between those two EMAs or it may breakout either to the upside or to the downside.
Alexander Londono – Analyst contributor at ActivTrades.
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