Moving averages can also point to
levels of support and resistance. At certain price levels, a currency pair can find support at short term, intermediate or long term MA lines. A Level of support occurs when a pair is falling and as price reaches a low level there are more willing buyers there than sellers. Maybe these buyers were waiting on the sidelines, and now that the pair has dropped to a certain low level they decide to buy. It can also be that those traders that already own long positions, because of a long term upward trend, and decide to buy more during a temporary price "dip". The opposite is true with levels of resistance. At a certain price during an upwards move, there are more willing sellers than buyers. As many investors watch similar moving averages, price “bounces off” the moving average or resistance/support level when many investors react at the same time to price reaching the moving average.
Figure 7 - This chart of the EUR/GBP pair shows a 55 period moving average acting as resistance on May 11th and as support on May 31st. There is also an example of whipsaw.
Moving averages can also help a trader to indicate when resistance turns into support. In figure 8 below we move a little forward in the EUR/GBP chart. We have the same support on May 31st. On June 9th the support is broken and the moving average is now changes to resistance. The investors and traders that believed the long term trend was upward, and had used the 55 period moving average as support, now may think that there is a downtrend coming. They now will use the moving average as resistance. This is a fairly common phenomenon when fundamentals of a currency change. Notice how the direction of the moving average has also turned down in a show of a downtrend.
Figure 8 - The chart of the EUR/GBP pair continues, showing the moving average that was used as support turning into resistance.
