The Camarilla equation was discovered by the trader Nick Stott in 1999, until recently a secret formula that allows to determine price levels similar to the pivot points, although according to many traders are more effective. Part of the assumption that the market has the tendency to return to a certain point of equilibrium that we could call average, pivot, etc. Based on this idea and through the equation it is possible to calculate 8 price levels in which changes in the trend are likely to occur.
As mentioned at the beginning of the previous paragraph, the Camarilla equation was secret until it was somehow made known. The equations for calculating the 8 levels are as follows:
H4 = ((HL) * (1.1 / 2)) + C
H3 = ((HL) * (1.1 / 4)) + C
H2 = ((HL) * (1.1 / 6)) + C
H1 = ((HL) * (1.1 / 12)) + C
L1 = C – ((HL) * (1.1 / 12))
L2 = C – ((HL) * (1.1 / 6))
L3 = C – ((HL) * (1.1 / 4))
L4 = C – ((HL) * (1.1 / 2))
H = It is the maximum of the previous session.
L = It is the minimum of the previous session.
C = It is the closing of the previous session.
As in the case of pivot points, there are currently variations to these formulas, the best known being the one that adds the following two levels:
H5 = (H / L) * C
L5 = C- (H5-C)
How do you operate the Camarilla equation?
Levels L1, L2, L3 and L4 are considered as carriers, while levels H1, H2, H3 and H4 are considered resistors when operating using the levels calculated with the Camarillas equation. In this case the levels of L3, L4, H3 and H4 are considered the most relevant. Therefore, when the price reaches the H3 level, it faces a very strong resistance in which the trader must consider opening a selling position and closing any position of purchase that has. If you open the sales position, you must place a stop loss on H4. Similarly, if the price falls and reaches L3, the trader must open a buy position and place a stop loss on L4.
When the price breaks the H4 and L4 levels it is recommended that the trader enters the same sense of the break, ie he must buy if he breaks H4 and sell if he breaks L4. However, it is important to wait for the price to remain above H4 or below L4 for at least 2 candelas or more.
Of course this is not a recipe that must be applied 100% all the time, each trader can use alternatives to this system that will depend to a large extent on the market in which it is operating. For example, some experts have verified that in the case of the Forex market, when breaking the level H3 it is best to enter buying with H3 target. The same applies in the case of the break of L3, ie open a position of sale with objective in L4. While this seems to go against theory and common sense, it seems that historical data prove the usefulness of this modification. In the end, as with any trading system, it is best to evaluate it in a demo account to avoid unnecessary losses.