The Camarilla Equation in calculates ten levels of intra-day support and resistance according to yesterday’s High, Low, Open and Close. There are 5 of these “S” levels below yesterday’s close, and 5 “R” levels above. They are numbered S1, S2, S3, S4 and S5 etc. The most important levels are S3, R3 levels and S4, R4 levels.
The main way to use Camarilla equation in stock or indices is to wait for price to approach S3 or R3. When price does so, traders expect market to reverse at S3 and R3 level and so they open positions against a trend and place protective stop loss outside closest S4 or R4 level.
Stop level at S4/R4 is only a suggested stop, you’ll learn why below, traders are encouraged to find their own stops according to the money management rules and risk appetite.
Should one immediately place an order once price hits S3/R3 level? Yes, if you trade aggressively, No, if you like to see confirmation first. For confirmation price have to hit S3/R3 level, find support or resistance there and clearly demonstrate an intention to reverse. Traders may want to learn about reversal candlestick formation patterns in order to be able to spot a confirmation of a turning market.
The second way to trade stocks, indices, forex with the Camarilla Equation is to look at S4/R4 levels to be breached, which would signal of a breakout trade setup and allowing traders trade breakout in the direction of a trend. For, example, if price pushes up through the higher S4/R4 level, the chances are it is going to keep on running that way. Breakout trading outside S4/R4 level expects to capture sharp directional market moves.
While running with the breakout outside S4/R4, use either suggested S5/R5 level or your own target.
After setting Camarilla levels on the charts, traders look at where the market has opened regarding the levels.
Market Open INSIDE S3/R3:
If the market opens inside the S3/R3 levels, you must wait for price to approach either of these two levels. Whichever it hits first determines a trade: if the higher R3 is hit, Short against the trend in the
expectation that the market is going to reverse. Initial SL above R4.
The opposite, applies when the Lower S3 level is hit first – go Long against the trend. Set SL below S4.
Market Open OUTSIDE S3/R3:
Taking profits is a matter of personal judgment – just be aware that you will want to take profits at some time during the day, because the market is unlikely to “behave” and stay right-sided for your trade. These reversals from S3/R3 appear to happen as often as 4 times out of 5 during intra-day trading.
Camarilla combined with Pivot Points:
Sometimes you may have also noticed that Pivot supports and resistances and the beauty of price reversal at it. You may use both Camarilla levels and Pivot levels to achieve better trading results.