Day trading with DARVAS BOXES
Nicholas Darvas was a famous dancer in the 1950’s who wrote the book “How I Made $2,000,000 In The Stock Market”. This was a non-fiction book – a real, true story about how Mr. Darvas started out with around $20,000 and turned it into over two million dollars ($2,000,000) by looking through the finance section of newspapers in the evenings and applying his secret formula, the “Darvas Box Formula”.
Not too many people have even heard of Darvas boxes before. You must admit – you’ve probably never heard of Darvas boxes either.
What are Darvas Boxes?
Darvas boxes are dynamic trading range boxes that are based upon a complicated state machine algorithm. These boxes have two areas. The bottom part (red rectangle) is a stop loss area and the top part is the “break out” area. When prices broke above the top of the box, Mr. Darvas would buy if the stock was making new highs on high volume. He would then stay long and add new positions as new boxes developed. When the price of the stock dipped below the stop-loss section of the box (a percentage of the price, just below the bottom of the box), he would take profits and move on to another stock.
A Graphical Representation
A Darvas box is a computed trading range as shown in figure below:
While the computation of a Darvas box is complex the interpretation of the box is simple. In a nutshell one would buy the security when prices broke out of the top of the box on high volume, typically only if the security was making a new high. If an existing position was held, one would exit the security if the price fell below the stop loss area (the bottom of the box).
While Darvas boxes don’t look too intimidating, Darvas boxes are one of the most difficult to compute. No technical indicator matches the level of complexity involved in calculating Darvas boxes. The entire process is a very complex state machine. The Darvas box uses several steps to identify a top and bottom, or “acceptable trading range”.
Darvas boxes are in just two words, extremely fascinating. The principle behind the Darvas boxes is nothing short of genius. And while calculating Darvas boxes may be intimidating to even the most savvy technical trading system developer, applying and using Darvas boxes as part of your trading strategy is extremely simple. Everything is automatic, even stop loss management. This is something you don’t typically find; one box that does it all.
It is highly recommended that you read the book “How I Made $2,000,000 In The Stock Market” to gain a solid understanding of how Darvas Boxes came about and how they work.