From the November 01, 2012 issue of Futures Magazine • Subscribe!

Trading stocks with Camarilla pivots

Trading strategies

Camarilla pivot points are interesting in that they offer guidance for both sideways and trending markets. Depending on the price levels in play, the indicator can suggest a trade that would exploit a reversion to the mean or a breakout to new highs or lows. Let’s walk through various hypothetical trading scenarios to demonstrate the utility of this approach.

Scenario 1: Price opens at or between Support 3 and Resistance 3

When price opens between S3 and R3, we will use the following rules to guide our trade execution:

  • Long trades: Let the price move to S3. At S3, go long with a stop loss placed five ticks below S4. Profit targets for this trade are R1, R2 and R3.
  • Short trades: Let the price move to R3. At R3, go short with a stop loss placed five ticks above R4. Profit targets for this trade are S1, S2 and S3.

The Financial Bull 3X Direxion (FAS) exchange-traded fund (ETF) tracks the value of financial sector stocks and provides roughly three times the leverage of cash positions in these stocks.

On Aug. 14, FAS had the following: Open, 94.50; high, 95.14; low, 92.55; close, 93.35. Based on these values, our Camarilla pivot point resistance and support levels are:

  • R1 = 93.59; R2 = 93.82; R3 = 94.06; R4 = 94.77  
  • S1 = 93.11; S2 = 92.88; S3 = 92.64; S4 = 91.93

 Thus, the trading strategy for Aug. 15 is: 

  • Buy at 92.64.  Stop loss: 91.88; Profit targets: 93.59, 93.82, 94.06 
  • Sell at 94.06.  Stop loss: 94.82; Profit targets: 93.11, 92.88, 92.64

The trade worked out. On Aug. 15 FAS opened at the lower end of the range and our long trade at S3 (92.64) was triggered immediately. Price quickly reached our price targets, and we scaled out of the trade (see “Hitting our pivots,” below). Another helpful risk-control guideline is to manage the stop loss actively. In this case, we moved the stop loss to the entry price when the first profit target was hit.

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