The Camarilla Equation is an interesting market analysis tool similar to the pivot points but is little known among the majority of traders. For this reason, in the following article, we will explain in detail about the fundamentals and use of this tool.
Camarilla equation was discovered by the trader Nick Stott in 1999, and until recently it was a secret formula to determine price levels similar to the pivot points, but according to many traders, these levels are more effective. It assumes that the market has the tendency to revert to a point of balance that might be called midpoint, pivot, and so on. Based on this idea and using the formula of the equation is possible to calculate 8 relevant price levels in which is likely to produce changes in the market trend.
As mentioned at the beginning of the preceding paragraph, the Camarilla equation was secret until it was somehow released. The equations for calculating the 8 levels are:
- L3= C-((H-L)*(1.1/4))
- H = is the maximum of the previous session.
- L = is the minimum of the previous session.
- C = The closing of the previous session.
- H5 = (H / L)
- L5 = C-(H5-C)
How to trade with the Camarilla Equation?
When we want to trade using the Camarilla equation we need to learn some principles. For example, the levels L1, L2, L3 and L4 are considered supports, while the levels H1, H2, H3 and H4 are considered resistances. In this case, the levels L3, L4, H3 and H4 are considered the most important. So when the price goes up to the H3 level, it is facing a strong resistance in which the trader should consider opening a short position and close any buy position that he have. If you open a sell position, you must place a stop loss in H4. Similarly, if the price falls and reaches to L3, the trader should open a buy position and place a stop loss at L4.
When the price breaks H4 and L4 levels is recommended that the trader enters the market in the same direction of rupture, ie the trader should buy if the price breaks H4 from below and sell if it breaks L4 from above. However, it is important to wait until the price remains above H4 or below L4 for at least 2 or more candles for ensuring that the breakout is real and not false as sometimes happens. Of course, this is not a strategy that must be applied 100% of the time as every trader can use alternatives to this system that will depend mainly on the market in which the investor is trading. For example, some experts have found that in the case of the Forex market, upon rupture of the H3 level, the best practice is to open a long position in the market with a take profit objective in H3. The same applies in the case of the rupture of L3 level, in which we open a short position with a take profit objective in L4.
While this seems to go against the theory and common sense, it seems that the 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.
Camarilla equation for Metatrader 4
You can download a free custom camarilla equation indicator for MT4 through the following link: Camarilla Equation for MT4