Many traders prefer day trading because of the many advantages of intraday trading. Many day trading techniques are used, the popular ones are Gann day trading technique and Pivot point trading techniques. Today we will discuss Camarilla Pivot Point trading technique which is being used by many day traders across the globe.
Camarilla pivot point formula is the refined form of existing classic pivot point formula. The Camarilla method was developed by Nick Stott who was a very successful bond trader. What makes it better is the use of Fibonacci numbers in calculation of levels. Below is the quote of famous trader Nick Stott
Everyone asks me that. When I first started trading, I thought (as a lot of people do!) that the markets were controlled by a secret ‘insiders club’ of powerful organizations who manipulated prices for their own benefit. I remember that at the time I was smugly sure that this was so, and was excited to be joining (as I then thought!) this secret ‘cabal’. Of course, as I learned more about the markets, I realized that this was nonsense, and that the markets are far too big to be effectively controlled, even by gigantic financial corporations. However, it still looked to me as though there was a pattern in what was supposed to be the ‘random walk’, a pattern that matched very closely what I imagined a ‘secret society’ would try to implement in order to maximize their revenues. The obvious conclusion, of course is that if you have enough participants, statistically they start to behave in broadly predictable ‘over-ways’, and this leads to the patterning that the equation is so good at predicting. The word ‘Camarilla’ is based on the Latin word for room (camera), and it means basically a small clique of ‘advisers’ who try to manipulate the person in power for their own ends. Frankly, it was just a joke, and I am always surprised at how seriously everyone took it.
Camarilla equations are used to calculate intraday support and resistance levels using the previous days volatility spread. Camarilla equations take previous day’s high, low and close as input and generates 8 levels of intraday support and resistance based on pivot points. There are 4 levels above pivot point and 4 levels below pivot points. The most important levels are L3 L4 and H3 H4. H3 and L3 are the levels to go against the trend with stop loss around H4 or L4 . While L4 and H4 are considered as breakout levels when these levels are breached its time to trade with the trend.
How to calculate Camarilla Pivot points
To calculate Camarilla Pivot points all you need is previous trading day’s high low and close value. Below are the equations for calculation various levels.
C = Previous day close
H = Previous day high
L = Previous day low
H4 = [0.55*(H-L)] + C
H3 = [0.275*(H-L)] + C
H2 = [0.183*(H-L)] + C
H1 = [0.0916*(H-L)] + C
L1 = C – [0.0916*(H-L)]
L2 = C – [0.183*(H-L)]
L3 = C – [0.275*(H-L)]
L4 = C – [0.55*(H-L)]
How to use Camarilla Pivot Points in Trading ?
Trading is done on the basis of open price on the next day. Since the market is very volatile in the first 15- 30 minutes of trade and operator action is high, we prefer using weighted average price or the price after 30 minutes as open price. Depending on the open price there can be different scenarios.
Case 1: Open price is between H3 and L3
Buy when the price move back above L3 after going below L3. Target will be H1, H2, H3 levels. Stop loss can be placed at L4 level
Wait for the price to go above H3 and then when it move back below H3 again sell or go short. Target will be L1,L2 L3 levels and stop loss above H4
Case 2: Open price is between H3 and H4
Buy when the price move back above H3 again after going below H3. Target will be 0.5%, 1% and 1.5% . Stop loss can be placed at H3
Wait for the price to go above L3 and then when it move back below L3 again sell or go short. Target will be L1,L2 L3 levels and stop loss above H4. Target L1, L2 and L3
Case 3: Open price is between L3 and L4
Wait for the price to go above L3 and then when it moves back above L3 again go long. Target will be H1,H2 H3 levels and stop loss below L4.
Wait for the price to go below L4 and then when it moves below L4 go short. stop loss above L3. Target 0.5%, 1% and 1.5%
Case 4: Open price is above H4
Buying can be risky at this level. Wait for the price to go below H3. As soon as the price moves below H3 go short. stop loss above (H4+H3)/2. Target L1 , L2 and L3
Case 5: Open price is below L4
Selling could be risky at this level as price has opened with big gap down. Wait for the price to go above L3. When the price moves above L3 buy with stop loss of (L4+L3)/2. Target H1, H2 and H3
These are the five cases based on open price on which you have to take trading decision. It gives good results by combining camarilla with other technical indicators like RSI and MACD you can further improve the accuracy. You can easily create Camarilla pivot calculator in excel. I have embedded a Camarilla Pivot point calculating excel sheet. You can refer it to create your own https://docs.google.com/spreadsheets/d/1rdN_DAtU7PoU7Yeqx9UBeY4RIuM_O8xNgO8-QB-9vPg/edit?usp=sharing
Abhishek is an Engineer MBA in Finance and Certified Research Analyst. He is an active trader and investor in the stock market since 20010. Follower of the philosophies of Warren Buffet and Peter Lynch in investing and trend following in trading.