Camarilla Pivot Points Trading Strategy
What are Pivot Points?
There are various types of pivot points. They all play important roles in trading charts and technical analysis. Pivot points are useful in the identification of crucial areas on price charts. They also serve as the basis of technical analysis in price charts that use pivot points.
Pivot points are such that several lines are drawn from a single pivot point. The lines drawn in the upward direction are known as the resistance lines. The lines drawn in the downward direction are known as the support lines. Similar to the usual support and resistance levels in normal price charts, two things may occur at the levels of support and resistance in pivot point charts:
- The price undergoes a trend change
- The price breaks these levels of support and resistance. This signifies a strong market trend
Below are the three ways of using these levels:
- Determine take profit levels
- Determine entry points for trades
- Determine stop loss levels
What are Camarilla Pivot Points?
Camarilla is a type of pivot point and it will be the focus of this article. Generally, pivot points help traders to make the best choice of entry and exit trading positions. Both beginners and experienced traders can use pivot points.
The Camarilla pivot point is a modified form of the classic pivot point. Nick Scott (an accomplished bond trader) introduced the Camarilla pivot point in 1989. The Camarilla pivot point uses Fibonacci numbers in calculating its pivot levels which is why it is different from the classic pivot point formula.
The Camarilla pivot point is an algorithm-based analysis tool for price action that generates possible intraday support and resistance levels. The image below shows what a typical Camarilla pivot point chart looks like.
Just like the classic pivot points, the Camarilla pivot point utilizes the high price, low price, and closing price of the previous day. Camarilla pivot points are a set of eight levels that function as support and resistance values for a prevailing trend. These pivot points are highly useful for traders as they help to identify appropriate stop loss and profit target orders.
There is also a single pivot level that is located right in between the levels of resistance and support. It can sometimes be referred to as PP or P level. When the price is beyond the pivot point, the actions of traders are considered to be bullish. However, when the price is below the pivot point, traders are considered to be bearish.
H = Previous day’s high
L = Previous day’s low
C = Previous day’s close
Below are the formulas for calculating the different levels of the Camarilla pivot points.
R1 =(H – L) x 1.1 / 12 + C
R2 =(H – L) x 1.1 / 6 + C
R3 =(H – L) x 1.1 / 4 + C
R4 =(H – L) x 1.1 / 2 + C
The formula for S1 is C – (H – L) x 1.1 / 12
The formula for S2 is C – (H – L) x 1.1/6
The formula for S3 is given as C – (H – L) x 1.1/4
The formula for S4is calculated as C – (H – L) x 1.1/2
S3.S4 and R3, R4 are the most crucial levels, and here is why. S3 and R3 are the levels to trade against the trend while placing a stop loss in the areas of S4 or R4. R4 and S4 are seen as breakout levels. When a breach occurs on these levels, it is a signal to trade with the trend.
The Camarilla pivot comprises four support and four (4) resistance levels that are closer than in other forms and variations of pivot points. This is why the Camarilla pivot point is more suitable for short-term trading strategies. The image below shows the Camarilla Classic pivot points on the same chart as above for comparison with Camarilla Pivots.
The Camarilla pivot point is essentially a form of technical indicator. Traders employ it to identify price levels in the market as well as the best entry and exit points. The versatility of the Camarilla pivot point regarding data generation is well known. This is why traders can use it in multiple ways. It can be combined with risk management strategies to produce specific results. It can also be used on its own as a pure trading strategy depending on the trader’s goals.
Regardless of how you decide to use the Camarilla pivot point, you must always remember that it is impacted by market conditions within a specific timeframe. This is why the Camarilla trading strategy has various major forms. The forms are determined by how and why a trader is interested in using the Camarilla pivot.
Popular Camarilla Trading Strategies
There are various popular approaches that traders adopt when using the Camarilla trading strategy. The approaches are determined by specific techniques and trading styles. There are two major approaches employed by traders for trading the Camarilla pivot point and they are discussed below.
Trend Trading Strategy
This approach revolves around following the trend. A trend is a strong move that indicates the direction in which the market is moving. It also has a huge influence on the price and drives it to higher or lower levels within a particular timeframe. The major advantage of adopting the Camarilla trading strategy here is the ability to pivot for the delivery of crucial data. This consequently allows traders to place the necessary stop-loss or limit orders. It also makes it possible for traders to pinpoint the best point of entry in the market.
When using this approach, traders endeavor to filter entries in the direction of a specific trend. Therefore, when the market is trending upwards, identify buying opportunities at the S3 pivot while a stop loss should be placed at S4. Conversely, if the market is trending downwards, identify selling opportunities near the R3 pivot. It then becomes more appropriate to place the stop-loss at the R4.
The chart below depicts a EUR/CHF chart that is experiencing an uptrend. Bearing this in mind, traders will be trying to enter the market on a long position at S3 with stops placed at S4 as shown below. There are different tools that the trader can use to pinpoint take profit levels. Examples include price action, Fibonacci extensions/retracements, or other technical indicators. However, the decision to use a specific tool is at the trader’s discretion.
Range Trading Strategy
A range is defined as a sideways market where price trading occurs between recognized lines of support and resistance. This means that in this type of market, the actions of traders are confined between these established lines. The traders that adopt the range trading approach are known as range traders. What they do is use the Camarilla pivot to identify short-term reversals and the price tendencies they will revert to in the future.
One of the major benefits of the Camarilla pivot is that it provides traders with a new range for trading every day. This allows traders to focus more on how price movement occurs within the daily trading range. It is the restricted area between the S3 and R3 pivots as seen in the image below. It enables range traders to have clear areas for planning their entries into the market.
Usually, range reversal traders will be looking for price movement to occur in the direction of a point of support or resistance. If resistance holds, range traders will try to initiate short positions close to the R3 pivot hoping that the price moves towards support. In contrast, if the price continues to be supported above the S3 Camarilla pivot, range traders will try to activate long positions close to the S3 pivot. This is done in the expectation that the price will move back in the direction of the R3 resistance pivot. However, traders should be aware that prices can remain range-bound for a whole day.
This is why this strategy is ideal for use in low volatility periods like the Asian trading session. During periods of higher volatility, traders will abandon this approach for one that is more encompassing of arbitrary price movements.
Practical Scenarios of how to use Camarilla Pivot Points for Trading
Camarilla Pivot Points guide traders in trading both trending and sideways markets. The open price on the next day or session serves as the basis for trading the Camarilla Pivot Points. Depending on the price opening point, the tool can suggest a trade that will enable the trader to capitalize on a reversion to the mean or a breakout to new highs or lows.
Below are five practical situations that explain how traders can use the Camarilla Pivot Points for trading.
The open price is above R4:
- An opening long position at this level can be risky which is why it is advisable to wait for the price to fall below R3.
- Take a short position immediately if the price goes below R3.
- The stop loss should be placed above (R4 + R3)/2. Focus on S1, S2, and S3.
The open price is between R3 and S3:
- Open a long position when the price moves back above S3 after falling below S3.
- The R1, R2, and R3 levels should be the target.
- Position the stop loss at the S4 level.
- Wait for the price to rise beyond R3 and once it reverts below R3 once more, open a short position.
- S1, S2, and S3 levels should serve as the profit target while the stop loss should be placed above R4.
The open price is below S4:
- It could be risky to sell at this level because the opening price has a big gap down.
- Wait for the price to rise beyond S3. Once that happens, open a long position.
- Position the stop loss at (S4 + S3)/2. R1, R2, and R3 should be the targets.
The open price is between R3 and R4:
- Open a long position when the price rises above R3 once more after falling below R3 initially.
- The targets should be 0.5%, 1%, and 1.5%
- Position a stop loss at R3
- Wait for the price to rise beyond S3 and once it falls back below S3, go short.
- S1, S2, and S3 levels should be the target while the stop loss should be over R4
The open price is between S3 and S4:
- Wait for the price to rise beyond S3 and once it rises above S3 again, take a long position.
- The focus should be on R1, R2, and R3 levels while the stop loss should be positioned below S4.
- Wait for the price to fall below S4 and once it drops below S4 again, take a short position.
- Position a stop loss over S3 and the target should be 0.5%, 1%, and 1.5%.
Pros and Cons of Camarilla Pivot Points
Camarilla Pivot is undoubtedly a very useful tool that brings about improvements in trading strategies. However, not everyone finds it ideal and it has its flaws as well as its benefits which are listed below.
- Generates levels of daily trading automatically
- Enhances the identification of clear entry and exit points
- Pinpoints support and resistance areas
- Highly beneficial for short-term traders
- Locates points that activate bearish and bullish activities
- Helps traders to develop a solid trading plan before opening a position in the market
- Enhances the risk management skills of traders
- Works adequately across all financial markets
- It is not ideal for long-term traders
- It can lead to extra losses if the wrong strategy is adopted and implemented in the wrong market condition
- It might appear too sophisticated for beginners to adopt and implement
The Camarilla trading strategy undoubtedly holds certain benefits for short-term traders. It certainly helps them to pinpoint price levels and their propensity for reversion. As a result, traders can use it as a guide to making the best choices in the market. This is made possible by the ability of the pivot point to show the best entry and exit positions for a specific market.
It also enables traders to place stop losses and limit orders in the right place. This cannot be emphasized enough as this action can be the difference between hemorrhaging losses and suffering limited losses. But then due to the sophistication of this tool, it might be complicated for novice traders to use. Therefore, they might end up using it wrongly and thus end up suffering huge losses that could be highly catastrophic.
It is important for traders interested in using this strategy to be knowledgeable and understand how limit orders work. This will allow them to use them appropriately in a way that will not end up being a problem for them. Also, it is better to seek professional advice from financial advisors before making any investment decisions. This will ensure that you understand the risks involved in that investment before you dive into it.