• : November 21, 2021
  • : Prashant Shah
 
Camarilla Levels
 
Hope you read the earlier newsletter writeup on the pivot levels. Continuing the discussion, we look at the Camarilla levels which is another widely followed tool.

Word ‘Camarilla’ is borrowed from Spanish. It translates to a group of confidential and private advisers of the King or person in authority.


The Camarilla equation was first developed by a bond trader named Nick Scott in 1989. It is said that he did not disclose the equation, but people studied the levels and reverse engineered it to find the formula. There are few versions of this formula, we’ll discuss the one being widely followed.

We discussed about ‘Range’ in the earlier article on Pivots. The range is basically the difference between High and Low of the session.

High – Low = Range of the session

Continuing with the same levels as an example, If High of the day is 105 and Low is 95, Range of the session is 10 points.


Range shows us activity during the session irrespective of the trend. If the range is narrow, it shows there was not much movement. If range is wide, there was a strong movement & activity.

Camarilla calculation depends on the Range of the session.

Let’s divide this range in four parts. Before that, let’s expand the range to 110%. If Current range is 10, let us make it 11.

Let’s now divide this Range in four parts.

9.17%, 18.33%, 27.50% and 55% of the range.
So, if Range is 10 points:

10 x 9.17% = 0.92
10 x 18.33% = 1.83
10 x 27.50% = 2.75
10 x 55% = 5.50



So, this range has four pies now. Let’s name them. L55, L27, L18 and L9.

There are 8 levels in Camarilla calculation. H1, H2, H3 and H4 plotted above the close of earlier session. L1, L2, L3 and L4 plotted below the close of the earlier session.

We divided the range of earlier session.

Which factor determines the strength of bulls or bears in the session?
Close.

Range = Volatility
Close = Trend and Strength.

We’ll decide calculation based on where was the close of the session.

If we add L9 to the close, we get H1. If we deduct L9 from the close, we get L1.
What will be H1 and L1 if High is 105, Low is 85 and Close is 103?
Calculate before reading next.

We calculated L9 earlier.

H1 = 103.92
103 + 0.92 = 103.92
L1 = 102.08
103 – 0.92 = 102.08

I am sure you would have guessed the other 3 levels by now.

Let’s calculate them.

Add and deduct L18 to close to get H2 and L2.

103 + 1.83 = 104.83 is H2.

103 – 1.82 = 101.17 is L2.

Add and deduct L27 to close to get H3 and L3.

103 + 2.75 = 105.75 is H3.

103 – 2.75 = 100.25 is L3.

Add and deduct L55 to close to get H4 and L4.

103 + 5.50 = 108.50 is H4.

103 – 5.50 = 97.50 is L4.


In Nutshell, Camarilla levels are based on the Range and position of the earlier close.

It is important to know that the position of the closing price plays an important role in placement of the levels.


What would have been the calculation had the close would have been in lower extreme in above example?

Below is the calculation if closing price was 97 instead of 103 in the above example.

Same range, lower levels went far from the current bar.

Hence, the next day level depends on current session trend with respect to range.



Some people call it Fib based levels. But that doesn’t seem to be the concept. It is a simple format of distributing the range and going from lower to higher pie for referring the levels.

8.33% of the Range is first level and it expands.

8.33 -> 16.67 -> 25 -> 50


From trading perspective, 1 and 2 have small pie. They will be very near to the closing price.

3 (L27) and 4 (L55) are strong players.



We’ll come back to the discussion on trading using these levels. There are couple of other levels that people plot. They are known as advanced Camarilla levels. I have seen the difference in levels people use. Let us discuss them.

If we divide High by low price, we get the percentage of high to low. Let’s call it R%.

High / Low = R%

Eg, High is 100 and low is 80, R% is 125%.



We can project closing price upwards and downwards by R% to get the advanced level.

In our example, R% is 110.53% (105/95).

Close multiplied by R% is advanced higher level, Let us call it RH level.

103 x 110.53% = 113.84.

Calculate the distance between RH from closing price and plot the equidistance level on the lower side.

113.84 – 103 – 10.84

103 – 10.84 = 92.16

Let’s call it R L level for now. RH and RL are R levels.



These R levels are used as H5 or H6 and L5 or L6.

If the RH level is H5,

Calculate difference between H5 and H4
113.84 – 108.50 = 5.34

Add 1.168 times of difference to H5 to get H6
(1.168 x 5.34) + 113.84 = 120.08

Difference between H6 and Close to be deducted from close to get L6.
103 – 17.08 = 85.92.


Some people plot the R level as H6 and L6.

If RH is H6, 32.12% of the range is added to H4 to get H5.
10 x 32.12% = 3.21

H5
108.50 + 3.21 = 111.71

L5
97.50 – 3.21 = 94.29

I would prefer plotting R levels as H5 and L5.


People use pivot level also in Camarilla calculation which we have discussed in the earlier thread. It is HLC / 3.

Hope you got the idea about how these levels are calculated. You can also plot them EOD timeframe. For example, Levels on Daily timeframe can be plotted based on Weekly or Monthly bar range.

As discussed, earlier Level 3 and 4 are stronger than others. H3 and L3 are considered as mean reversion levels. They are useful in rangebound markets. Sell at H3 with stop-loss of H4, L1 and L2 are target areas. Buy at L3 with stop-loss of L4 for target areas of H1 or H2.

H4 and L4 are last line of support and resistance. Price sustaining above H4 is a bullish breakout, H5 and H6 could be target levels. Price sustaining below is a bearish breakout, L5 and L6 are target levels. People also track it based on the open price. With advanced levels, there would be 12 levels of Camarilla.

I think we can reduce it to 6 levels. H3 and L3 (L27) is a mean reversion. H4 and L4 (L55) are breakout levels. So, you consider it breakout if based on highest pie of previous range. Plot R level as H5 or L5 and treat it as a target area for breakout trades.

Going above H4 and falling below H3 is a bearish reversal pattern. Going below L4 and bouncing back above L3 is a bullish reversal pattern. Look for price confirmation.

To make it more effective, look for favorable price patterns at that area and trade based on it. We can also use tools like VWAP or Anchor point for filter. There are many possibilities of trading using these levels and applying confirmatory rules. It can be a useful technique, but I would personally like to look at anything based on price patterns.

If you are trading price patterns, I think H4 and L4 are sufficient. Trade breakout patterns and look for range expansion when price is beyond these levels. Else, look for mean reversion patterns or avoid trading. Nonetheless, you can also use any of these levels for profit booking.



Now when you know the calculation, do you think that levels will be placed too far when the previous session range was very high, and close was in near mid-range? Do you think levels will be too close when session range was narrow? Draw candle on a piece of paper and imagine it. Can you guess the L55 levels without even plotting it? – Roughly 50% of the range.

Camarilla or group of confidential advisers could try to manipulate the person in power for their own ends. Nick Scott, the innovator of concept initially believed that markets are controlled by secret ‘insiders club’ of powerful people and organizations who manipulate prices for their own benefit. Later he learned that markets are far too big to be effectively controlled by anyone. I remember reading similar thing in the old Gujarati handwritten book by Mr Kanti Parekh.

The Pivot, CPR and Camarilla tools that we discussed in last three threads are techniques to plot levels based on the earlier session. I have some ideas on this concept. I wish to write more about that. But that is later.

The intention of this thread was to share the logic of the tool and some possibilities. Hope you liked it.