Darvas Box Trading Strategy

Darvas Box Trading Strategy – Trend Following Trading Strategy

In this article, I will discuss Darvas Box Trading Strategy – Trend Following Trading Strategy in detail. The Darvas Box trading strategy is a momentum-based method developed by Nicolas Darvas in the 1950s. Darvas was a dancer by profession, but he developed a keen interest in the stock market, eventually creating a trading system that turned a $10,000 investment into $2 million within a period of 18 months.

Who is Nicolas Darvas?

Nicolas Darvas, the Father of the Darvas Box Trading System. The Darvas Box Trading System is a trend-following system created by Nicolas Darvas in the late 1950s.

He reportedly turned thousands of dollars into millions in the late 1950s. He wrote a popular book in 1960,How I Made $2000000 in Stock Market,” in which he explained his Box theory. It is a must-read. He developed a list of criteria that he found most indicative of the potential he was looking for, using a combination of fundamental and technical approaches.

What is a Darvas Box? And Darvas Box Rules

The Darvas Box Trading System is a trend-following system that means only entering stocks that were in confirmed uptrends. Today, top traders and investors use it to find the market’s momentum growth stocks and ride their trends to profits.

Darvas Box Rules

He developed a list of criteria that he found most indicative of the potential he was looking for, using a combination of fundamental and technical approaches. The Darvas trading rules:

  1. Establish a trend: There has to be a trend for the Darvas box method to work. If the market is in an uptrend (look for buying opportunities) or if it is in a downtrend (short-selling opportunities in derivative).
  2. The stock is making a new 52-week high, and the stock is breaking with high volume (he gave more importance to the volume also)
  3. After the new 52-week high is set, three consecutive days do not exceed the high (4 days total). The new 52high becomes the top of the box.
  4. After finding the top of the Darvas box, look for the bottom of the Darvas box. When a stock fails to make new lows after three days (4 days total)
  5. Extend the upper and lower of DARVAS BOX: The end of the Darvas box is extended until it’s breached.
  6. Buy the break of the Darvas box once it exceeds the high by a few points
  7. A close below the bottom of the Darvas box is the sell signal.
  8. You can pyramid to your position as it moves into each new Darvas box or trail your profit using the bottom of the next Darvas box as a guide.

Although the Darvas box strategy is largely based on technical analysis methods, Darvas combined it with some fundamental analysis to determine what stocks to trade.

Additional Rule:
  1. Buy companies fundamental
  2. Check the overall market trend; go with the overall market trend
  3. Check whether the stock belongs to the strong sector
When to avoid:
  1. Buying breakouts during bear markets
  2. Using this method within sideways markets
  3. Ignoring sector movement

How to Draw a Darvas Box?

Step 1 trend

The first step is the stock making a new 52-week high and the stock breaking with high volume (he gave more importance to the volume also)

How to Draw a Darvas Box?

Step 2 Top of Darvas box

Wait for three consecutive days that do not exceed the high (4 days total). high is set. The new high becomes the top of the box. Check the image below.

Darvas Box Trading Strategy – Trend Following Trading Strategy

Step 3 bottom of Darvas box

After finding the top of the Darvas box, look for the bottom of the Darvas box. When a stock fails to make new lows after three days (4 days total)

Darvas Box Trading Strategy – Trend Following Trading Strategy

Step 4 Entry and Exit using the Darvas Trading System
  1. Extend the upper and lower BOX: The end of the box is extended until it’s breached.
  2. Buy the break of the box once it exceeds the high by a few points
  3. A close below the bottom of the box is the sell signal.

Darvas Box Trading Strategy – Trend Following Trading Strategy

Step 5 Pyramiding using Darvas Trading Strategy

You can pyramid to your position as it moves into each new box or trail your profit using the bottom of the next box as a guide.

Pyramiding using Darvas Trading Strategy

Example of Darvas Trading Strategy

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Example of Darvas Trading Strategy

Example of Darvas Trading Strategy

Darvas Box Trading Strategy Summary:

The Darvas Box trading strategy is named after Nicolas Darvas, who developed the method in the late 1950s. Darvas was a professional dancer, but he created one of the most famous trading systems while traveling the world and relying on telegrams for his stock market information. He documented his strategy in “How I Made $2,000,000 in the Stock Market.” The Darvas Box strategy is a momentum strategy that uses technical analysis to identify stocks experiencing strong upward trends.

Here’s a simplified breakdown of how the Darvas Box strategy works:

  • Stock Selection: Darvas started with a universe of stocks already showing significant upward momentum. He often looked for stocks hitting new 52-week highs.
  • Volume Filter: He paid attention to trading volume as a confirmation of the strength behind stock price movements. An increase in volume suggested that the stock was garnering attention from the market and could sustain the upward trend.
  • Box Formation: When a stock reaches a new high, Darvas creates an imaginary “box” around its recent price range. The new high defined the top of the box, and the bottom was a recent low in the stock price.
  • Buy Signal: Darvas would buy when the stock price moved upwards through the top of the box on increased volume. This breakout was viewed as a continuation of the stock’s upward momentum.
  • Stop-Loss Orders: After buying a stock, Darvas immediately set a stop-loss order just below the bottom of the latest box. This was his way of limiting potential losses if the stock reversed its trend.
  • New Boxes: If the stock continued to make new highs after he bought it, Darvas would draw new boxes atop the old ones, raising his stop-loss orders and the new bottom levels of these boxes.
  • Selling Strategy: Darvas would sell his holdings in two situations: if the price fell to the bottom of the current or a previous box (hitting his stop-loss) or if the stock achieved his target price based on his fundamental valuation.

Darvas’ method is particularly notable for its focus on technical patterns and trading volume. It also incorporates a disciplined approach to risk management through stop-loss orders. The strategy is suited for trending markets, and it may not work as well during choppy or sideways markets.

Today, traders who use the Darvas Box method might enhance it with modern tools and indicators, such as moving averages, relative strength index (RSI), and more sophisticated volume analysis. However, the core principles of the strategy remain centered on the concepts of momentum, volume, price levels (support and resistance), and disciplined exit strategies.

In the next article, I will discuss the Volatility Contraction Pattern (VCP) Trading Strategy – How to Trade the Volatility Contraction Pattern with Examples. Here, in this article, I try to explain Darvas Box Trading Strategy – Trend Following Trading Strategy with examples. I hope you enjoy this Darvas Box Trading Strategy – Trend Following Trading Strategy article. Please join my Telegram Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts.

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