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 days 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.
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