Review of Camarilla Equation

History

Discovered in 1989 by Nick Stott - a successful bonds trader - the Camarilla equation quite simply expounds the theory that markets - like most time series - have a tendency to revert to the mean. In other words, when markets have a very wide spread between the high and low of the day before, they tend to reverse and retreat back towards the previous day's close. This suggests that today's intraday support and resistance can be predicted using yesterday's volatility. [This doesn't sound like any sort of unbelievable revelation to me but I put it up here as per some reading I have done into it. There are some mighty claims surrounding its potential.]

THE ALLEGED EQUATION* 

H4 = [1.1*(H-L)/2]+C
H3 = [1.1*(H-L)/4]+C
H2 = [1.1*(H-L)/6]+C
H1 = [1.1*(H-L)/12]+C

L1 = C-[1.1*(H-L)/12]
L2 = C-[1.1*(H-L)/6]
L3 = C-[1.1*(H-L)/4]
L4 = C-[1.1*(H-L)/2]
H* = Previous Day's high
L* = Previous Day's low
C = Previous Day's Close
*ALLEGED BECAUSE I FOUND IT ON THE WEB I DID NOT DEVISE IT
H* & L* ARE SUCH LETTERS ALONE - NO NUMBER FOLLOWING LIKE H4 OR L3 ETCTrading with the Camarilla Equation

The Camarilla Equation involves trading both with and against the trend using simple rules based around price penetration of the L3 and L4 levels at the bottom of the days range, or the H3 and H4 levels at the top of the day's range. It relies on entering and exiting trades with the backing of major support or resistance. The positioning of these levels are determined by the equation. To use the Camarilla Equation, we need yesterday's open, high, low and close. The calculation then gives us 8 levels of intraday support and resistance. There are 4 of these levels above and 4 levels below yesterday's close. See equations above and charts below.

The important levels to note are the L3 and H3 levels, where you may expect a reversal to occur, and the L4 and H4 levels that shows you where a major breakout has been confirmed. How you enter a trade depends on the way the market opens.

HOW TO APPLY THE NUMBERS TO A TRADE

This applies to long or short trades – buying or selling. If the market opens between the L3 and H3 levels – below H3 and above L3 - wait for the price to approach either of these two levels. Whichever it hits first - L3 or H3 - determines your trade.

If the HIGHER – H3 - level is hit; go SHORT - against the trend - with the expectation that the market is about to reverse. Some traders recommend using the higher – H4 - level as your stoploss point, as a penetration up thru the H4 level actually shows that a major breakout may be under way.
A security consideration is to wait for price to bounce back down inside the H3 level before entering the trade. The logic here is that you will actually be trading with the – short-term – trend.
A LONG position is the opposite scenario: If the LOWER – L3 – level is hit; go LONG. In this case you could use the lower – L4 – level as your stoploss. To apply a safer trade here; wait for the price to come back up inside the lower L3 level, before going LONG.

IF the market opens outside the L3 or H3 levels

This scenario involves waiting for the market to move back up through the L3 level or down through the H3 level. In this case, you will be trading with current short term trend. Your stoploss could be the L4 or H4 levels if your account allows it or a lesser level based on current results while following this system. This is something that needs further observation to tweak. Taking profits for this system was not included with this document. I cannot suggest a profit level other than to base it on any other intraday profit level which appears viable based on current data. Using trailing stops after a 30 or 40 pip profit seems a good place to start with more volatile markets.
Research shows that these reversals from L3 and H3 happen as often as 4/5 times – 80% - during intraday trading.

Trading a breakout – L4 or H4 breached

If price rises above – or breaks through - the H4 level – go LONG – BUYIf price drops below – or breaks through – the L4 level – go SHORT – SELLI also found these equations with regards to this equation. I know nothing about them other than what they are – again – allegedly for:HL5 = (hi/lo)*closeHL4 = ( ((hi/lo)+0.83)/1.83 ) *closeHL3 = ( ((hi/lo)+2.66)/3.66 ) *closeLL5 = close - (HL5-close)LL4 = close - (HL4-close)LL3 = close - (HL3-close)This is all I have on this -apparently - elusive system. My thoughts are that the concept is in no way ingenious. The concept is practical and moderately – out-of-the-box. It is clearly similar to pivot points with a different approach as per the calculations. Only testing will tell if it actually works. The camerilla equation calculator is on end of this blog page scroll down.. experiment yourself.. Happy Trading!!