Day Trading With The Camarilla Equation

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Day Trading with the Camarilla Equation


Overview


In 1989, bond trader Nick Stott introduced the 'Camarilla Equation,' a formula for day trading that promises to enhance trading success with minimal risk. While it might sound legendary, there's a method to its efficiency.

Understanding the Camarilla Equation


The Camarilla Equation emerged from the observation that most time series tend to revert to the mean. This equation calculates eight levels using the previous day's open, close, high, and low prices to identify potential reversal points.

Utilizing Trading Signals


The key levels to focus on are L3, L4, H3, and H4. When prices hit the H3 level, it suggests strong resistance, prompting a SHORT trade with a stop loss at H4. Conversely, at the L3 level, strong support is indicated, recommending a LONG trade with a stop loss at L4.

Breakout Opportunities


Typically, H4 and L4 levels are used for setting stop losses. However, if these levels are broken and sustained, they signal potential for significant LONG or SHORT trades. Although less frequent, these situations can yield substantial profits according to the Camarilla Equation.

Selecting Entry Points


There are two strategies:

1. Counter-Trend Trading: Enter a trade when the market reaches L3 or H3. This approach goes against the trend, which carries a risk if the trend persists.

2. Trend-Following Approach: Wait for the market to break L3 or H3 and reverse, then enter the trade as the market crosses the level again. This method aligns with the trend, offering a safer option.

Does It Work?


Curious about the Camarilla Equation’s effectiveness? Follow along as I test these levels in the FTSE 100, Dow Jones, and DAX 30 stock markets.

You can find the original non-AI version of this article here: Day Trading With The Camarilla Equation.

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