How To Trade Stocks Using The Darvas Box
Nicholas Darvas was a Canadian dancer in the 1950’s who managed to turn $8,000 into over $2,000,000 (worth over $20,000,000 in 2016 when accounting for inflation) over a period of 5 years. He did this through a series of well-planned out investments. Darvas developed a trading method called the Darvas Box, and consequentially he wrote a book called “How I made $2,000,000 in the Stock Market.” The link to his book is available on the Market Prowler resources page. It is a recommended must-read for swing traders and anyone who suffers from trader’s anxiety. The Darvas Box trading method is a simple yet extremely efficient one. In its simplest form it takes into account support and resistance levels and allows a trader to go up with a trend, setting well calculated stop losses should a trend turn against him.
There are rules for what constitutes a Darvas box on a chart and what doesn’t, however, lucky for us modern technology can automatically calculate and draw these boxes for us. This saves us from having to spend hours upon hours examining charts and drawing boxes with a pencil like old man Darvas once did. Below you can see a Daily graph for AMD with Darvas boxes applied to it. You may notice how the boxes are stacking on top of eachother, or as Darvas called it in his book, “building a pyramid.” Darvas boxes can be used to trade anything, whether it’s stocks, options, index futures, etc.
The rules for successfully initiating long or short trades as well as placing proper stop losses using the Darvas Box method are extremely simple.
5 Steps to trading a Darvas Box:
1. We find a chart (such as AMD) where the boxes are successfully stacking on top of each other.
2. We use software (such as ThinkOrSwim) to calculate the top and bottom of the current box.
3. We wait for the price action to break above the top (or the ceiling) of the current box, and if the current trading day has a closing price that is greater than the ceiling of the current box, we go long.
4.We set a stop loss that is 25-50 cents below the ceiling that the price action just blew through.
5.Sit and wait patiently for price action to either hit your stop or move up and form a higher box. If your stop is hit that means that the trend changed and is now going down, if the price action breaks the ceiling into a higher box we adjust our stop accordingly.
If you want to short a stock using the Darvas Box method the rules are the same, except now your indicator is price action breaking the bottom (or floor) of a box instead of the ceiling.
Using AMD as an example: The first box’s ceiling was broken at $2. We go long and place a stop-loss order at $1.75. Once a new box was formed a couple of weeks later, we move our stop loss up to $2.35, (.25 below the $2.60 floor). Waiting patiently the price never fell .25 below the floor, and the next price movement upwards broke above the $3.00 ceiling. We move out stop loss to $2.75. A new box is established between $3.40 and $4.10 so we move our stop loss up to $3.15. We continue adjusting our stop loss accordingly as price moves up and new boxes are formed.
Using the Darvas Box method, there was absolutely no point in time where the stock price fell down 0.25 below a box’s floor, so we were never stopped out. Over the course of a few months our initial $2.00 buy in reached a high of $7.15, that’s over 350% gain. Note: as of writing this in August of 2016, this is actually a trade that I, the Owner am still in. My stop loss is set appropriately at $0.30 below the floor and I am just waiting for AMD to either make a new box or hit my stop.
Bonus Points: when you are long and a new Darvas Box is formed, that’s an ideal time to add on to your position. Successful traders tactfully increase the size of winning investments and let them grow over time. I have added to my initial $2.00 buy in 5 times now, buying more shares each time a new box was formed.
Tired Of Losing Trades?
Do you make a few good trades but then lost it all in one or two bad trades? We’ve been there. In fact, that’s a completely normal step in learning. If you’ve ever wondered how professional traders can do so well in the markets, it’s because they’ve got a trick or two up their sleeve. Consistency in trading income is just a matter of who has the best information. Certain tools can give a trader an unfair advantage over everyone else when it comes to putting in orders. Professionals know this and use these tools to take advantage of every-day traders who are trading blind. If you want to learn more about what we’re talking about, click here to check out this piece of professional grade trading software. Market Prowler is committed to bringing every-day traders the tools they need to trade like a professional.