Where R1 through R4 are Resistance levels 1 to 4, PP is the Pivot Point, S1 through S4 are support levels 1 to 4, H is High, L is Low. C stands for the Closing price.
Trading Breakouts with the Camarilla Equation
The Camarilla Equation calculates eight levels of intra-day support and resistance according to yesterday's High, Low, Open and Close. There are 5 of these "L" levels below yesterday's close, and 5 "H" levels above. They are numbered L1, L2, L3, L4 and L5 etc.The most important levels are L3, H3 levels and L4, H4 levels.
The main way to use Camarilla equation is to wait for price to approach L3. When price does so, traders expect market to reverse at L3 and H3 level and so they open positions against a trend and place protective stop loss outside closest L4 or H4 level.
Stop level at L4/H4 is only a suggested stop, 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 L3/H3 level? Yes, if you trade aggressively, No, if you like to see confirmation first. For confirmation price have to hit L3/H3 level, find support or resistance there and clearly demonstrate an intention to reverse. Learn about reversal candlestick formation patterns in order to be able to spot a confirmation of a turning market.
The second way to trade with the Camarilla Equation is to look at L4/H4 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 L4/H4 level, the chances are it is going to keep on running that way. Breakout trading outside L4/H4 level expects to capture sharp directional market moves.
While running with the breakout outside L4/H4, use either suggested L5/H5 level or your own target.
Market Open INSIDE L3/H3
If the market opens inside the L3/H3 levels, you must wait for price to approach either of these two levels. Whichever it hits first determines a trade: if the higher H3 is hit, Short against the trend in the expectation that the market is going to reverse. Initial S/L above H4. The opposite, applies when the Lower L3 level is hit first - go Long against the trend. Set S/L below L4.
Market Open OUTSIDE L3/H3
In this case, you wait for the market to retreat back through the L3/H3 level - you will then be trading with the trend, and once again, the L4/H4 levels act as you Stop loss.
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 L3/H3 appear to happen as often as 4 times out of 5 during intra-day trading.
Swing Trading Strategies
The goal of all swing trading strategies is to enter high probability trades based on an anticipated direction of price. Swing traders can trade either counter-trend, or trade with the trend. By going with the major trend, you are following the smart money. Following the smart money greatly increases your chances of placing winning trades. There are four main processes of any swing trading strategy.
1. Identify the Trend :- The price trends for a specific time frame can only exist in one of three scenarios; up trend, down trend or sideways trend. Trades should ideally only be placed in the direction of the main trend. Trends can be identified using a variety of different tools from price action to indicators.
2. Wait for a Price Retracement against the Trend :- Once the main trend has been identified, you should be waiting or looking for some kind of "pullback". Pullbacks against the trend are representations of profit taking taking place before another move in the direction of the trend occurs. By trading pullbacks to an area that offers lower risk, swing traders once again increase their odds of entering a profitable trade by making sure they get in at a good price.
3. Identify Risk vs. Reward :- You should only trade when the anticipated profit is two to three times the amount you are willing to risk. By having a 2:1 or 3:1 profit/loss ratio for your trades you only have to win a 35-40% of your trades to make a profit. If the risk/reward ratio is not adequate you should pass on the trade.
4. Place the Trade :- With the trend correctly identified price at a level which is in your favor, you can now place your trade knowing the EXACT possible outcomes.
