Discovered in 1989 by a semi-legendary bond trader called Nick Stott, it is allegedly a secret day trading formula that will help your day trading reach new heights of accomplishment, with the bare minimum of risk. Or so the story goes.

Origins of the Camarilla Equation Discovered while day 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 - namely that most time series have a tendency 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 previous trading day's open, close, high and low levels and some interesting mathematics to produce these supports and resistances.

Trading 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 ones that are most important. When the price level reaches the H3 level the theory behind the Camarilla Equation says that there is a strong resistance at this point and that a SHORT trade should be made with a stop loss at the H4 level. Conversely, when the price drops to the L3 level there is a 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 the above trades, occasionally there will come a point when these points are broken through. If this breakout is maintained for a significant amount of time and the price is still on the move then a LONG or SHORT trade should be entered respectively. These trades are not so common but could provide massive profits (or so the Camarilla Equation suggests).

Choosing entry point with Camarilla Equation There are two entry points that you may like to consider when using the Camarilla Equation. Firstly you could trade as soon as the market reaches either the L3 or H3 level and go AGAINST the current trend but there is more of a 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 the L3 or H3 level until the reverse actually occurs and enter the trade just as the market passes the respective level once again. This allows you to trade WITH the trend which should prove a safer option.

So does it Work? If you are interested in whether or not the Camarilla Equation provides a viable trading method then you may wish to follow the stock markets indeces, before actually using it.

Camarilla

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The zone between R1 and S1 is known as “Trend-forming Zone”, This zone is most of the times very volatile and difficult to trade, hence Avoid making any New Trade Entry while the stock is trading in this ZONE.

Trend Reversal Zone : The Zone between R1 and R2 and the Zone between S1 and S2 are known as trend reversal Zones. Any stock opens in this Zone above R1 and goes towards R2 (especially when the market trend is bearish), will get resisted at R2 and commence bearish run towards S2 and further below till Break-Down and S5 and sometimes even below. The vice-versa is also applicable especially when the market trend is bullish and the stock is trying to test S2, will get support and proceed towards R2, Break-out and R5 and even above.

Bullish Zone : If the stock Opens the day between R2 and R3 or R3 and break-out, it is in Bullish Zone.

Bearish Zone: If the stock Opens the day between S2 and S3 or S3 and Break-down, it is in Bearish Zone.

Break-out Zone: If the stock opens above break-out level and within R5, it is break-out Zone.

Break-Down Zone: If the stock opens below break-down and above S5, it is break-down Zone.

Trade Reversal :- When ever break-down or break-out levels are used as Stop-loss, you have to REVERSE the trade on Hitting the STOP-loss with DOUBLE the quantity, keeping previous entry point as the current STOP-loss.

Caution :

Any stock opening beyond the levels of S5 or R5 are NOT tradable using this CAMS equations, though there are advanced calculations available, it is highly risky, hence better ignored.

Also, stocks opening in Danger Zone not to be traded till they form a clear trend.

Trade Along the trend of the Market, till you get experienced, However, experienced traders may trade stocks against the overall market trend, Only IF the stock trades above R3 consistently or below S3 consistently.

Please Take position only AFTER 10-30 AM after assessing the market trend.

Trade pattern – 1:-
If a stock opens in Danger Zone or in Trend reversal Zone , and when the Stock Moves in the OPPOSITE Direction of the Overall Market trend, wait till the stock encounters S3 or R3. These are very powerful resistance and support Zones, When the overall trend is against this stocks movement, these levels will Buck the trend of the stock and send in sync with the overall market trend. For Example: – Nifty is Bullish and trading approximately 40 points above the open price and bullish since open, IF you find any stock heading towards S3, please watch and you will find the stock getting resisted at S3, initiate Long position at this level (more cautious traders can WAIT for the stock to make “Higher” – LOW, before entering), with Target as R3 and Stop-loss as S4. The vice versa is to be done at R3 to go Short when the market is bearish. If the stock DOES not get resisted at R3 or does not get support at S3, wait for the stock to go to R4 or S4 then take position, after it breaks-out or breaks-down, keeping R3 and S3 as SL, for a target of R5 and S5.

Trade pattern – 2 :
Any stock opening between R3 and break-out is sure to break out (Well almost – hehehe – no one can be 100 % right), usually this will re-test R3 at least once before break-out, that is better entry point. Keeping, R2 as Stop-loss you may target R5 for the day. The vice versa is true for Break-down and S3 levels.

Trade Pattern – 3 :
Any stock opening above break-out or below Break-down, will usually re-test breakout/breakdown level before proceeding, initiate trade at this re-test time with R3/S3 as stop-loss and R5/S5 as target.

On the trades attaining the target or even before it attains I usually clear 25 to 50 % of the holding to cater for the stop-loss (incase the stock suddenly reverses) and ride the trend with trailing stop-losses.

Trade Pattern – 4:
Quick traders/experienced and jobbers, can use each level crossing as entry for the target of next level. They should keep caution on S3, R3 and Break-down, Break-out levels as these can act as reversal points for the trend.

Very important, 95 % of day traders are LOOSERs only 5 % make profits, please exercise utmost care while doing intraday trading.

If the previous day’s range had been big , usually the stock will trade between R-3 and S-3, use R-3 and S-3 to “BUCK” the trend keeping R-4 and S-4 as stop-loss. The stop-loss given in these methods are very powerful, and whenever the stop-loss is hit, you may REVERSE the trade with DOUBLE the volumes and make good profits.