Darvas Box Revisited

schizo

schizo

Here I want to discuss the principle theories of Darvas Box and how it might be useful in today's trading environment.

I plan to basically do a page by page analysis of the two books I have in my possession. They're both publicly available, so I encourage you to download and follow, should you wish.

How I Made $2,000,000 in the Stock Market
http://www.swingtradesystems.com/ebooks/How-I-Made-2000000-in-the-Stock-Market.pdf

How I Made Money Using the Nicolas Darvas System, Which Made Him $2,000,000 in the Stock Market
http://1.droppdf.com/files/PfLB0/how-i-made-money-using-the-nicolas-darvas-steve-burns.pdf


Question: Have the markets changed?
Darvas: “Have the markets changed?” In short No. You see the markets are simply human emotion reflected in $$’s. People really need to get this into their heads. It’s not about logic. Company results. Mathematics but emotion. When emotion and logic collide. Emotion will always come out ahead. The way I traded in the 1950’s and made such fantastic money was simply the same method Livermore and Barauech traded before me. I traded the same way right the way through the 1960’s and 1970’s. And I am certain it will be the same going into the year 2000. It’s all about riding huge waves of emotion to the maximum. The big money is made from these moves. It’s crazy. But we are only human…Well you see, to me my method had to make sense. I had to be able to explain it to my partner (who knows absolutely noting about stocks) and she had to grasp the reason why it worked. In short it had to have a lot of common sense about it. My Darvas method was simply looking for the most in demand stocks, in the best sectors in a market Not GOING down. I would ride them as far as the ride would let me and exit when it was over…Makes sense right? But if you ask many traders to explain their method and straight away they mention Elliot Waves, Fib. Retracements, Cycles etc…my question is always So WHY should a stock go up because of this? I am always left with a blank expression. They simply had no valid reason to trade these stocks. It had no common sense reason to go up. And I found most complicated technical analysis is like this. Great on theory short in common sense. Traders are much better spending their time on managing themselves and managing their money than trying to find a new “secret” to the markets.

From Time Magazine Monday, May. 25, 1959

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I went to the British Library newspaper section in Colindale, London and found this from Time magazine.


Time magazine May 1959 p84-85 Business

Pas de Dough

The lights go low at Manhattan's garish Latin Quarter nightclub. Onto the stage glides a slim hipped, broad shouldered man in white tie and tails. He grasps his partner, a stunning redhead in black tights, whirls her over his head on one arm, hurls her dramatically in a split-legged fall to the floor. The dance team is Nicholas Darvas and his half sister, Julia, one of the top acts in the U.S. What the tired businessmen watching the show do not realize is that Hungarian-born Nicholas Darvas, 39, is a better moneyman than most of them; he is a top stock-market speculator who has has parlayed his considerable weekly income ($3,500 currently) into a fortune of more than $2,000,000.
Moneyman Darvas' methods would raise the eyebrows of most Wall Streeters. Instead of studying the fundamentals -price earnings ratios and dividends-he judges public enthusiasm, a method that works best in volatile markets. "In my dancing I know how to judge an audience," he says "It is instinctive. the same way with the stock market. You have to find out what the public wants and go along with it. You can't fight the tape, or the public.
Mental Charts. Darvas' system is tailored to his job. Since he has to do trading from wherever he is dancing (he recently completed an Asian tour) he ignores tips, financial stories and brokers' letters, has never been in a brokers office. Basically, his approach is that of a chartist; he watches price and volume. But the only charts he keeps are in his head. He studies the weekly stock tables in Barron's, receives a nightly wire from his broker giving the high, low and closing of stocks he is following, as well as the Dow-Jones averages. When a stock makes a good advance on strong volume, he begins watching it, buys when he feels that informed buyers are getting in. For example, when he was playing in Calcutta, he noticed E.L. Bruce moving up in the stock tables. Suddenly, on 35,000 shares it moved from 16 to 50. He bought in at 51, though he knew nothing about the company, and "I didn't care what they made." (they make hardwood flooring.) He sold out at 171 six weeks later.
Darvas places his buy orders for levels that he considers breakout points on the upside. At the same time, he places a stop-loss sell order just below his buy order, so that if the stock does not move straight up after he buys, he will be sold out and his loss cut. "I have no ego in the stock market." he says. "If I make a mistake I admit it immediately and get out fast." Darvas thinks his system is the height of conservatism. Says he; " If you could play roulette with the assurance that whenever you bet $100 you could get out for $98 if you lost your bet, wouldn't you call that good odds?" If he has a big profit in a stock, he puts the stop loss order just below the level at which a sliding stock should meet support. He bought universal controls at 18, sold it at 83 on the way down after it had hit 102. "I never bought a stock at the low or sold one at the high in my life," says Darvas. "I am satisfied to be along for most of the ride."
Limiting his selections to five or six stocks at a time, Darvas often studies one for weeks or months before buying. He steers away from blue chips, buys only growing companies. "I am only in infant industries where earnings could double or treble," he says. "The biggest factor in stock prices is the lure of future earnings. The dream of the future is what excites people, not the reality."
Eight Hours A Day. Darvas studied economics at the University of Budapest, fled Hungary for Turkey in World War II (he still holds Turkish citizenship), methodically trained eight hours a day to become a dancer. He came to the U.S. in 1951, got interested in the market in 1952 when a Toronto nightclub owner paid him off in a mining stock that promptly trebled. (He sold it at that point; it later collapsed.) Darvas trained for the market just as methodically as he had studied his dancing, read some 200 books on the market and the great speculators, spent eight hours a day until saturated. two of the books he rereads almost every week; Humphrey Neill's Tape Reading and Market Tactics and G.M.Loeb's The Battle for Investment Survival . He still spends about two hours a day on his stock tables. Even though he has made a fortune he plans to keep on dancing. Dancing is his business; the stock market is just that second income.
 
think I remember seeing something about Darvas box. overly fancy way to describe a consolidation pattern or sideways range after a break out of range. happens frequently in equity markets in a secular uptrend (spx dji etc) but wont happen in mean reverting markets (eg commodities) or choppy/trendless markets. sometimes the ranges hold sometimes they dont. dont need a whole book for that. basic anatomy of a trend.
 
schizo said:
Here I want to discuss the principle theories of Darvas Box and how it might be useful in today's trading environment.

I plan to basically do a page by page analysis of the two books I have in my possession. They're both publicly available, so I encourage you to download and follow, should you wish.

How I Made $2,000,000 in the Stock Market
http://www.swingtradesystems.com/ebooks/How-I-Made-2000000-in-the-Stock-Market.pdf

How I Made Money Using the Nicolas Darvas System, Which Made Him $2,000,000 in the Stock Market
http://1.droppdf.com/files/PfLB0/how-i-made-money-using-the-nicolas-darvas-steve-burns.pdf


Question: Have the markets changed?
Darvas: “Have the markets changed?” In short No. You see the markets are simply human emotion reflected in $$’s. People really need to get this into their heads. It’s not about logic. Company results. Mathematics but emotion. When emotion and logic collide. Emotion will always come out ahead. The way I traded in the 1950’s and made such fantastic money was simply the same method Livermore and Barauech traded before me. I traded the same way right the way through the 1960’s and 1970’s. And I am certain it will be the same going into the year 2000. It’s all about riding huge waves of emotion to the maximum. The big money is made from these moves. It’s crazy. But we are only human…Well you see, to me my method had to make sense. I had to be able to explain it to my partner (who knows absolutely noting about stocks) and she had to grasp the reason why it worked. In short it had to have a lot of common sense about it. My Darvas method was simply looking for the most in demand stocks, in the best sectors in a market Not GOING down. I would ride them as far as the ride would let me and exit when it was over…Makes sense right? But if you ask many traders to explain their method and straight away they mention Elliot Waves, Fib. Retracements, Cycles etc…my question is always So WHY should a stock go up because of this? I am always left with a blank expression. They simply had no valid reason to trade these stocks. It had no common sense reason to go up. And I found most complicated technical analysis is like this. Great on theory short in common sense. Traders are much better spending their time on managing themselves and managing their money than trying to find a new “secret” to the markets.

From Time Magazine Monday, May. 25, 1959

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More...


I agree about the highlighted blue that today most traders including myself for 10 years can barely explain or even understand their own complicated method,, i cant tell you i know everything but I've studied just about every indicator and style out there and never made money till i toned it down to one indicator and systemized position size that undid 10 years of losing for me,, its sad because i see friends today that explain to me super complicated method and at the end of the conversation iam like the market is 2d, up
Or down,, i cant even understand their method ket aside someone none trader understand it,,
 
For those who are having difficulty identifying trend, here is a modified version of Darvas Box using channels. I believe this will complement well with Darvas Box itself. Basically, you only buy when the trend is up (number 1) and short when the trend is down (2). You buy at the bottom and sell at the top of the channel. It doesn't matter if the price is breaking out above or breaking down below. The point is never chase after price. Your probability of winning is much higher if you buy at the bottom and sell at the top. This will be done if you buy the pullback at the bottom of the channel in an uptrend. Ditto for the downtrend, only you're shorting the bounce once it hits the upper channel line. Suppose the price breaks down and it sinks below the lower channel line. Then you draw same line 100% below the current channel and repeat using the same buy/sell conditions. Same if it were to break above the upper channel line.

Note: This is an hourly chart.

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What is a Darvas box?

In his investigations of stock price movements, Darvas discovered that stocks don’t move in a straight line. They fluctuate up and down. But a stock in an up trend has a peculiar pattern, a rhythm that can be observed and used to time one’s stock purchases and place one’s stop loss orders.



Excerpt from Applying the Darvas Method
http://marcodenouden.com/breakoutreport/volume5/BreakOutReport111906.pdf



Notes to myself while reading Darvas Box:
  • Market trends only about 20% (eg. breakout). Other 80%, it trades rangebound (eg. box).
  • The ultimate goal of trading is to milk the cow as much as you can. Hence, you need to MAXIMIZE your gain (breakout) and MINIMIZE your losses (breakdown).
 
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I've kind of followed Darvas's method for the last 15 or so years.

No I didn't make 2 million but it has kept me out of a couple major corrections. Had I used margin, like Darvas, I might have.

It simple boils down to buying stocks that are going up and getting out when they go down.
Hold the winners and cut your losses quickly.(I've heard that before somewhere)

The box system simply attempts to define support and resistance and gives a plan of action when price crosses those areas.

Following what Darvas did to make his millions leads to a lot of whipsaws in todays market.
 
deaddog said:
I've kind of followed Darvas's method for the last 15 or so years.

No I didn't make 2 million but it has kept me out of a couple major corrections. Had I used margin, like Darvas, I might have.

It simple boils down to buying stocks that are going up and getting out when they go down.
Hold the winners and cut your losses quickly.(I've heard that before somewhere)

The box system simply attempts to define support and resistance and gives a plan of action when price crosses those areas.

Following what Darvas did to make his millions leads to a lot of whipsaws in todays market.
More...

Yeah, I imagine everyone knows what Darvas Box is, so I plan to omit going into any details about it. In today's parlance, it would simply be called a trading range. However, I believe there are still some nuggets of truth that are overlooked and worth digging up. Also it's very flexible, and you can literally interpret in a myriad of ways.
 
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