Darvas Box Trading Strategy

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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)

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.

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)

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.

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.

Example of Darvas Trading Strategy

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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.