Dynamic EQ is like a regular EQ, except that the gain of the bands can automatically respond to the level of the audio. There are many different variations of dynamic EQ – ranging from automatic, with few additional controls, all the way to fully configurable (with all the complexity that goes with it). Some dynamic EQs are designed to be ‘coloured’, where the processor has been deliberately designed to modify the audio in a complex, automatic and (hopefully) pleasing way. Other dynamic EQs are designed to be surgical and transparent, where the processor will only make exactly the change that you dial in.
Because of the variation in controls and approaches (not to mention behaviour), it’s difficult to provide specific advice for settings or configuration. Typically dynamic EQ will be used in mastering, and in similar situations to multiband compression. Think of it as a kind of multiband compression that’s even more targeted and surgical.
Dynamic EQ is ideally suited to removing ugly resonances that appear intermittently. Regular EQ would affect the audio even when the ugly resonance is not sounding, and multiband compression wouldn’t be surgical enough (likely to affect frequencies either side of the resonance).
As with multiband compression, dynamic EQ is best avoided unless it’s absolutely necessary and the problem can’t be fixed earlier in the mixing or recording process.