Table of Contents
- Understanding Darvas Box Theory
- Key Takeaways from the Theory
- Nicolas Darvas's Beginnings
- Darvas's Bestseller and Rise to Fame
- The Core of Darvas Box Theory
- What Darvas Box Theory Tells You
- Darvas on the Time Cost of Fundamental Analysis
- Darvas Box Theory in Practice
- Limits of the Darvas Box Theory
- Similar Theories and Strategies
- The Bottom Line
Understanding Darvas Box Theory
Let me explain Darvas box theory directly: it's a trading strategy I can tell you was developed by Nicolas Darvas, targeting stocks that hit new highs with volume as a key indicator.
You use this approach by buying stocks reaching new peaks and selling when they drop from those levels. The method defines 'boxes' based on recent highs and lows to guide your entry and exit points, relying on price and volume to spot momentum and trends, especially in rising markets.
Key Takeaways from the Theory
This technical tool lets you target stocks showing increased trading volume. It's not tied to any specific timeframe, so you draw boxes along the recent highs and lows for whatever period you're analyzing.
Remember, Darvas box theory performs best in a rising market, and you should focus on bullish sectors to make it work effectively.
Nicolas Darvas's Beginnings
Born in 1920 in Hungary, Nicolas Darvas grew up amid the chaos leading to World War II. He studied economics at the University of Budapest, but his real passion was dance, not stocks.
As the war intensified, he fled to the United States in the 1940s. There, he teamed up with his half-sister Julia to create the dance duo 'Darvas and Julia,' known for its grace and athleticism. They toured globally, performing in nightclubs and theaters.
Despite his stage success, Darvas developed an interest in the stock market. In 1952, he made his first investment in a Canadian company on a whim, turning a modest profit that sparked his obsession.
Darvas's Bestseller and Rise to Fame
While touring, Darvas relied on weekly Barron's issues for stock prices and volume data, studying from afar. This distance helped him focus on broader trends, leading to his box theory, unlike real-time analyses of the time.
He shifted from dancing to trading as America recovered from the 1929 crash. Between 1957 and 1959, he reportedly grew $10,000 into over $2 million.
Time magazine featured him in 1959, highlighting the booming market. In 1960, he published 'How I Made $2,000,000 in the Stock Market,' detailing his method. He used only stock prices from The Wall Street Journal and Barron's, claiming to turn $10,000 into $2 million in 18 months with boxes and strict rules.
His story, from outsider to millionaire, made the market seem accessible to everyone, thanks to his straightforward style.
The Core of Darvas Box Theory
Darvas's work draws on early technical analysis, evaluating trends via price moves and volume to find trading opportunities.
Variations might use different periods for boxes or add tools like support and resistance. He created this when information was slow, without real-time charting.
Darvas analyzed price and volume to pick profitable stocks when technical analysis was new. His boxes surround price consolidations, gaining popularity for systematic market analysis.
A key part is his focus on future technological breakthroughs. He stayed aligned with markets chasing the next big thing, not just reliable stocks. As he wrote, he searched for stocks climbing due to visions of the future, investing in transformative potential over established ones.
What Darvas Box Theory Tells You
This theory applies market momentum and technical analysis for entering and exiting positions. You draw boxes along lows and highs, seeing rising or falling patterns as you update them. Stick to trading rising boxes and use breached highs to adjust stop-loss orders.
Darvas described his strategy as jogging with an upward trend, trailing stop-loss behind, buying more as it continues, and exiting fast when it reverses.
Though mainly technical, it includes fundamental analysis for stock selection. He called himself a 'techno-fundamentalist,' favoring exciting industries and companies with solid earnings, especially in choppy markets.
He argued stocks promising dynamic development behave better, appealing to investors' zeitgeist. Look for improving earning power or its anticipation when buying. Follow market fashions and exit before they change, like a good dance partner anticipating moves.
Darvas on the Time Cost of Fundamental Analysis
In his book, Darvas recounts suggesting a stock to his secretary, whose father insisted on deep fundamental analysis. While waiting, the stock rose 40%, a gain the father missed but Darvas didn't.
Darvas Box Theory in Practice
Focus on growth industries expected to outperform the market. Select a few stocks, monitor prices and trading daily, using volume as the sign a stock is ready to move.
When you spot an unusual move, create a box with a narrow range from recent highs and lows—the low is the floor, high is the ceiling.
Buy when the stock breaks the ceiling, using that level as stop-loss. Add to the position and raise stop-loss as more boxes break. The trade ends when stop-loss triggers.
Limits of the Darvas Box Theory
Darvas built this during a very bullish period, so it may lead to small losses if trends don't develop.
Trailing stop-loss and following momentum have become common since. The real value is the discipline it demands, like logging and reviewing trades as Darvas emphasized.
Similar Theories and Strategies
Methods like the turtle trading system use breakouts over past highs or lows, similar to Darvas. Swing trading profits from expected price swings.
Popular Momentum Strategies
- Trend following buys securities in upward trends above a moving average and sells on downward shifts.
- Sector rotation shifts to outperforming sectors and out of weak ones.
- Investing in high-beta stocks expects faster rises in rallying markets.
Popular Volume Indicators
- Volume-weighted average price factors in price and volume for average assessment, used by day traders.
- On-balance volume adds volume on up days and subtracts on down days to predict price changes.
- Accumulation/distribution line spots divergences between price and volume for potential moves.
The Bottom Line
Darvas boxes provide a technical approach to spot strong upward trends in stocks via defined boxes for buy and sell levels. It's effective in bullish phases, stressing price movements, volume, and disciplined momentum trading.
Other articles for you
Notching is the practice by credit rating agencies of assigning different ratings to various debts of the same issuer based on their risk and priority.
Usury involves charging excessively high interest rates on loans, often illegal and regulated to protect borrowers from predatory practices.
A variable interest rate fluctuates over time based on an underlying benchmark, offering potential savings but also risks compared to fixed rates.
An option pool reserves company shares for employees to attract talent in startups, often diluting founders' ownership through investor demands.
A universe of securities is a defined set of investments sharing common features, used by investors to tailor portfolios based on risk, asset class, and other parameters.
Surplus lines insurance covers high or unusual risks that standard insurers avoid, available from non-admitted carriers without state guaranty fund protection.
Economic value represents the subjective benefit a person derives from a good or service, distinct from its market price.
A windfall tax is a government-imposed levy on industries or individuals experiencing unusually high profits due to external factors, aimed at redistributing those gains for public benefit.
The marketing mix is a framework using the four Ps—product, price, placement, and promotion—to develop effective marketing strategies for products or services.
A FICO score is a credit rating tool used by lenders to assess a borrower's reliability based on their credit history.