Camarilla Equation Indicator

Camarilla Pivot Points were introduced by Nick Scott in the year 1989, which is an advanced version of the classical Pivot Point. The basis for this indicator is the tendency of price to reverse itself to the mean price.

In this article, you will read about this indicator in detail, with multiple examples, and scenarios to give you deep insight into how to use the indicator for your stock market trading.

Stock Analysis using Camarilla Indicators

Analyze stocks using our Camarilla Indicator tools –

What is Camarilla Indicator?

Camarilla Pivot Point is a mathematical/ technical indicator that provides different support and resistance levels to the traders for helping them find the right point of entry and exit from the market.

There are a total of 8 support and resistance levels provided by this indicator – 4 support and 4 resistance levels.

The shorter gaps between the support and resistance levels compared to other Pivot indicators make this indicator ideal for day traders and short-term traders.

How does the indicator works?

To understand how the Camarilla Pivot Point indicator works, we need to understand the calculation behind the support and resistance levels. So, here are how they are determined –

• R4 which is Fourth Resistance level is determined by = C + {(H-L) *1.5}
• Then R3, the third Resistance level = C + {(H-L) *1.25}
• R2 or the second Resistance Level = C + {(H-L) *1.1666}
• R4 or 1^st Resistance level = C + {(H-L) *1.0833}
• Pivot Point (PP) = (H+L+C)/3
• S1 or First Support level = C – {(H-L) *1.0833}
• S2 or Second support level = C – {(H-L) *1.1666}
• S3 or third support level = C – {(H-L) *1.25}
• S4 or fourth support level = C – {(H-L) *1.5}

Here,

C = previous day’s closing price

H = High of the previous day

L = Low of the previous day.

The most important support levels are S3 and S4 and similarly, the most important Resistance levels are R3 and R4.

The S3 and R3 levels are considered if you want to go against the trend. In this case, you need to have stop loss around the S4 and R4 levels.

The S4 and R4 levels are considered breakout levels, and if these levels are breached, then the trader must trade in the direction of the trend.

How to use Camarilla Indicator?

To understand how you can use Camarilla Pivot Point Indicator, we have to use some scenarios or hypothetical situations.

To set Camarilla Indicator for use, you need to first check the opening price for the trading session you are using this indicator for. Here are the scenarios where you can put to use this indicator –

1. Open price of the asset you are trading in between R3 and S3: If this is the scenario, then you have to –
   3. Buy the asset when the price of the asset moves above the S3 level after falling below S3. The target price will be R1, R2, and R3 in this case.
   4. Then place a stop loss at the S4 level
   5. Then you need to wait until the price goes above R3 and then when it falls back from R3, sell the asset or you can go short as well.
   6. You can keep the profit target as S1, S2, or S3 with the stop loss at R4.
2. If the open price is between R3 and R4
   3. In this scenario, you need to buy the asset when the price of the asset falls below R3 and then moves back above R3. Here your target will be to achieve 0.5%, 1%^, and 1.5%.
   4. You need to place the stop loss at R3
   5. Then wait till the price exceeds S3 and then falls below the level – at this point sell or go short
   6. Your profit targets will be S1, S2, and S3 with R4 as stop loss.
3. If the open price is between S3 and S4
   1. You need to wait until the price exceeds S3, buy or go long.
   2. Your target will be R1, R2, and R3 levels while the stop loss will be below S4.
   3. Go short or sell the asset when the price falls below S4.
   4. Place stop loss at above S3 and the target would be 0.5%/1% or 1.5%.
4. If the open price is above R4
   3. When the price is above R4, there is a market breakout, and buying the asset at this price can be highly risky. Let the price drop below R3.
   4. Then when the price is below R3, short your asset
   5. Finally, place the stop loss above (R4+R3)/2 level and target for S1, S2, and S3.
5. If the open price is lower than S4
   1. Do not sell at this point as it can be highly risky. Wait for the price to go above S3 and then buy or go long.
   2. Place the stop loss at a level that is the average of S4 and S3 and target R1, R2, and R3.

Different Camarilla Pivot Strategies

There are two strategies that you can use with Camarilla Pivot Indicator. They are –

Camarilla Pivot Range Strategy

This is a strategy for price trading between the 8 lines of support and resistance, this is why it is called a range strategy. The traders can benefit a lot from this strategy as they can get a new range for trading every day.

If the trader is trying to make a profit out of short-term range reversal, then he or she should focus on the price when it is moving between S3 and R3 levels.

This area is referred to as the trading range every day and helps the traders decide the entry and exit points easily. Usually, these traders look for price movement towards a support level or resistance level.

If the price is held by resistance, then the trader would look for going short around the R3 pivot and the target would be the price moving towards support.

On the contrary, if the price is supported by the support levels, then the trader would look to buy around a price of S3 and wait for the price to go up to R3.

However, if you are opting for this strategy, you should also keep in mind, that the price may trade within the range only for the entire day.

When the share markets are less volatile, this strategy works the best and for the more volatile period, we have the next strategy.

Camarilla Pivot Trend Strategy

As you, all may know that trend plays a crucial role in determining your strategy, and this Camarilla Pivot strategy is about using that trend to make your traders work.

In this strategy, the trader has to look in the direction of the trend and filter out entries/ orders accordingly. If the market is in an uptrend, then you need to look for going long opportunities at the S3 level with the stop loss at S4.

While if the market is down trending, then you need to look for opportunities to sell or short at R3 with a stop loss at R4. This strategy can be really useful for the traders as it takes into account the market trend along with the pivot points.

Advantages of Camarilla Pivot Points

If you are wondering why to use the Camarilla Pivot Points as an indicator to support your trading practices, here are certain advantages of this indicator –

• Firstly, this indicator is just perfect for short-term traders. While there are so many financial resources for investors, short-term traders, and day-traders, there are limited tools and resources. So, it is important to understand and learn about those which are available and Camarilla Pivot Point is one of them.
• Then this indicator helps in predicting any kind of asset in different financial markets. Whether you trade stocks, bonds, commodities, or currencies, this indicator can help you in all of them.
• Finally, the investment risk management skills of the trader can be improved using this indicator as this indicator helps in understanding the right point for entry and exit from the market. So, when you enter the market at the right time and exit it at the right time, then your risk of losing money goes significantly down.

Limitations of Camarilla Pivot Points

While there are so many advantages of using the Camarilla Indicator, there are certain limitations as well which as a trader you must know to wisely choose your indicator –

• Though it is a right indicator for short-term traders, the long-term traders or investors cannot make much out of it. There is not much use for this indicator in long-term investment or trading.
• If you are a novice trader, it may be difficult for you to understand this indicator in the beginning. You need to have enough market experience and knowledge about technical analysis to make proper use of this indicator.
• If you apply an incorrect strategy then it can lead to huge losses. So, while using the indicator, make sure, you have adequate knowledge of the market and you know why you are using the strategy and whether it is the right strategy or not.

Conclusion

To conclude, It is evident that Camarilla Pivot Point can be a great technical tool for intraday and short-term traders.

They can use this indicator to understand when to enter the market and when to exit, which is the most crucial decision that needs to be taken by any trader.