Nicolas Darvas was a dancer, self-taught investor and author who developed a trading system known as the "Darvas Box Theory." The theory was outlined in his book "How I Made $2,000,000 in the Stock Market," published in 1960. Darvas developed his trading method through trial and error, eventually achieving significant financial success.
The Darvas Box Theory is also known as DAR CARD, is a technical analysis strategy that involves identifying specific price ranges within which a stock is trading. Darvas believed that stocks tend to move in a series of boxes with a defined upper and lower boundary. He looked for stocks that broke out of these boxes, signaling a potential trend continuation.
Here are the basic principles of the Darvas Box Theory:
- Identifying the box: Darvas looked for stocks with a clear and defined trading range. He drew boxes around the highs and lows of the price action, creating a visual representation of the consolidation phase.
- Volume confirmation: Darvas believed that the breakout from the box should be accompanied by increasing trading volume. High volume would indicate the presence of significant buying or selling pressure, supporting the validity of the breakout.
- Entry point: Once a stock broke out of the box with increased volume, Darvas would enter a position. He used a buy-stop order slightly above the box's upper boundary to automatically execute the trade when the price surpassed that level.
- Protective stop-loss: Darvas used a stop-loss order to limit his potential losses. He would place the stop-loss order slightly below the lower boundary of the box. If the price fell below that level, the stop-loss would trigger, and he would exit the trade.
- Trailing the stop-loss: As the stock price continued to rise, Darvas would adjust his stop-loss order to protect his profits. He would raise the stop-loss to the bottom of the latest box formed during the upward trend.
- Repeating the process: Darvas would continue to identify new boxes and trade breakouts as long as the stock remained in an uptrend.
It is important to note that, it is a discretionary trading method that relies on the trader's judgment in identifying the boxes and executing the trades while the Darvas Box Theory gained popularity. It doesn't incorporate fundamental analysis or other technical indicators commonly used in trading strategies.
As with any trading system, it's crucial to thoroughly understand and test the methodology before applying it with real money. It's also recommended to combine the Darvas Box Theory with other tools and indicators to increase the probability of success and manage risk effectively.
