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Intraday trading with the Camarilla equation

Discovered in 1989 by a semi-legendary bond trader named Nick Stott, it is supposedly a secret daily trading formula that will help your daily trading reach new heights of achievement, with the minimum of risk. Or so the story goes.

Origins of the Camarilla equation

Discovered during intraday trading in 1989 by Nick Stott, a successful bond trader in the financial markets, the ‘Camarilla’ equation uses a truism of nature to define market action, that is, most time series they tend to revert to the mean.

The equation produces 8 levels that are meant to predict these reversal points, allowing the trader to profit from them. The equation uses nothing more than the open, close, high and low levels of the previous trading day and some interesting math to produce these supports and resistances.

Exchange the signals

Now these levels are numbered L1-4 for the supports and H1-4 for the resistances but it is really the L3, L4, H3 and H4 that are the most important.

When the price level reaches the H3 level, the theory behind the Camarilla Equation says that there is strong resistance at this point and a SHORT trade should be made with a stop loss at the H4 level.

On the contrary, when the price falls to the L3 level there is strong support and a LONG trade is the recommendation with a stop loss at the L4 level.

Breakout possibilities

While the H4 and L4 levels should normally be reserved for setting stop losses on earlier trades, there will occasionally come a point where these points are broken. If this breakout is sustained for a significant period of time and the price is still moving, then a LONG or SHORT trade should be entered, respectively.

These trades aren’t that common, but they could provide massive profits (or so the Camarilla equation suggests).

Choosing the entry point with the Camarilla equation

There are two entry points that you can consider when using the Camarilla equation. First of all, you could trade as soon as the market reaches the L3 or H3 level and go AGAINST the current trend, but there is a greater danger that the trend will continue and you will lose out if this is your preferred method.

The alternative is to wait after the market has broken through the L3 or H3 level until the opposite actually occurs and to enter the trade just as the market passes the respective level once more. This allows you to trade WITH the trend that should be a safer option.

So does it work?

If you are interested in whether the Camarilla equation provides a viable trading method, you can follow my experiment, which is testing the given levels for the FTSE 100, Dow Jones, and DAX 30 stock markets.

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