Nick Stott, a successful bond trader who day traded for a living, developed the Camarilla Pivot Point Calculator in 1989. Stott developed this tool based on his observation that when the market has a significantly wide spread between the high and the low on the previous session, the current session’s price tend to retreat back to the previous session’s low. This coincides with theory that says any time series tend to revert back to its mean.
The Camarilla Pivot Point Calculator has 8 pivot points in contrast to the classic pivot point calculator’s six. The first range of pivot points represents the four resistance lines which are tagged as R1, R2, R3, and R4. The second range of pivot points represents the four support lines which are tagged as S1, S2, S3, and S4. It uses the average of the high, low, and closing price as the pivot.
The formula used in calculating the Camarilla pivot points are as follows:
R4 = Close of the previous session + Difference between the High and the Low * 1.1/2
R3 = Close of the previous session + Difference between the High and the Low * 1.1/4
R2 = Close of the previous session + Difference between the High and the Low * 1.1/6
R1 = Close of the previous session + Difference between the High and the Low * 1.1/12
Pivot Point = (HIGH + LOW + CLOSE of the Previous session) / 3
S1 = Close of the previous session – Difference between the High and the Low * 1.1/12
S2 = Close of the previous session – Difference between the High and the Low * 1.1/6
S3 = Close of the previous session – Difference between the High and the Low * 1.1/4
S4 = Close of the previous session – Difference between the High and the Low * 1.1/2
There are four significant pivot points here which are considered as the price action points namely R3, R4, S3, and S4. Using the Camarilla method in trading, a sell position is initiated between R3 and R4 with R4 serving as the stop loss point. Conversely, a buy position is initiated between S3 and S4 with S4 serving as the stop loss point.
Take note that under this method trading is only initiated when the price reaches the second extreme points with the most extreme pivots servicing as the protective stops. You should not misconstrue this as trading against the trend rather what you are doing is trading the intermediate range consistent with the theory that prices tend to go back to its mean.
You can however avoid bucking the trend by favoring trades which are in the same direction of the major trend. For example, if the major trend is bullish then you should favor buying when the price gets into the range between S3 and S4. Likewise, if the major trend is bullish then you should favor selling when the price reaches the range between R3 and R4.
Another way of trading forex using the Camarilla method is to trade the breakouts. This time you use only the extreme pivots S4 and R4 as your reference points. You initiate a buy when the price breaches R4 and initiate a sell if the price breaches S4 instead. You are actually running the breakout here with the belief that after breaking through the extreme pivot points the price has enough momentum to continue in the same direction.
Again, this is not another Holy Grail for forex trading. You should use this in conjunction with other analytics and any trading decision you make must be backed up by a strong underlying fundamental.