DARVAS BOX

From the book

"How I made $2,000,000 on the stock exchange"

In late 1956, Nicholas Darvas proceeded on a world tour.  He was a successful professional dancer.  He had previously made a little money in the stock market.  In the next 18 months, he placed a sequence of stock trades by telegram even as he continued to travel and perform.  He started with a stake of $10,000.  When he returned to the USA 18 months later, that initial stake had grown into more then $2,000,000!

What made this even more amazing was that Darvas was not a professional investor and devoted little more than an hour a week to pick his investments and review his portfolio.  He was trading on data that was usually dated by at least a week and sometimes by considerable more.

Wherever he was, Darvas would check in at the nearest US Embassy and demand an airmailed copy of the Wall Street Journal and Barrons.  He would ignore everything except the stock quotes.  He would place his orders on a purely technical method that didn't even require charts.  He had no idea whatsoever what the companies he bought did, yet he found himself with a completely upwardly mobile portfolio and he sold out at the top of one of the biggest bull markets in history.

Darvas had started investing as a pure fundamentalist.  He then tried some technical investing.  Then he attempted to combine the two.  By the time he embarked on his tour, he was convinced that technical analysis worked best for him.  Also there was the practical difficulty of researching American companies while sitting in Nepal or India circa 1957.

THE METHOD

He stuck to technical price and volume data which he could get, albeit with a large time lag.  His identifying signal was a large volume expansion that suggested a surge in demand.  He would set what he called a "box" which is an acceptable trading range.  If the stock stayed within that range he would continue to watch it with his position still alive.  If the stock fell out of that range, he would sell it automatically with a stop loss order.  If the stock rose out of the range, particularly on large volume, Darvas would buy more.  This time he would use a trailing stop loss.  His second order would raise the level of the stop loss order.  This would be set slightly below the bottom of the new "box" in which the stock traded.  If the stock rose again, he would move up the trailing stop loss.  This ensured an automatic booking of profit of the stock before it started to lose ground.  If the stock continued to gain, Darvas's system would not allow a sell.  The amazing thing is that Darvas had the mental vision to do this without drawing charts.  The interesting thing is that Darvas could trade so successfully in such a leisurely fashion while using a completely technical system.

PRACTICAL APPLICATION FOR TODAY'S MARKET