From The Free Forex Encyclopedia
The Camarilla Equation is a popular “secret” day trading equation. Its discovery is commonly attributed to day trader Nick Scott.
The principle behind the Camarilla Equation is the idea that market trends tend, over time, to revert to a mean. The Camarilla equation takes four variables from the previous trading day: the market opening, market closing, high and low. Based on these variables, the Equation generates eight price levels. The lowest four are “support” levels, labeled from L1 to L4. The highest four are “resistance” levels, labeled from H1 to H4. These levels represent points at which a reverse toward the mean will occur on a given trading day.
Levels L3 and H3 are the most important levels generated by the equation. At level L3, the market is strongly supported, suggesting a reverse toward higher prices. At level H3, the market has a strong resistance, suggesting a reverse toward lower prices. Levels L4 and H4 are “breakout” levels, meaning that if market prices exceed these levels, the equation asserts that this breakout trend will continue for some time.
Due to its “secret” nature, there are many different versions of the Camarilla Equation, some more complicated (and accurate) than others. The validity of the Camarilla Equation is debated, and research on its predictive ability is currently being done by trader Steve Waller.
The name comes from the Spanish word camarilla, meaning a group of secret advisors, often involved in intrigues.