Darvas Box Explained – Trend Following System for Any Time Frame.
The Darvas Box was a fascinating trading discovery in the mid 1900s. Eponymously named, Nicolas Darvas was able to devise a system to trade the markets from anywhere in the world with only a magazine and telegrams.
A truly captivating story, and one that is recounted in his book How I Made $2,000,000 in the Stock Market , it is a worthwhile read for any trader .
Despite the use of his system as a swing trader, the Darvas Box indicator can be used in today’s markets on any timeframe. And to that end, we’ll discuss the strategy, rules, and best practices for the Darvas Box in this post.
Who is Nicolas Darvas?
Nicolas Darvas was a professional dancer that traveled the world with his sister in their own dance company during the 1950s. At one point, after receiving shares of a stock as a gift, he became obsessed with the markets and put countless hours into the study of market movements and internal mechanics.
It’s really fascinating to think that he was able to teach himself how to trade the markets just by reading books and newspapers . In fact, his favorite two were The Battle for Investment Survival by Gerald M. Loeb and Tape Reading and Market Tactics by Humphrey Bancroft Neill. He also took Barron’s magazine publication and regularly searched for up-and-coming companies.
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It was this intuition on up-and-coming companies that benefitted Darvas greatly. He was a master of “social arbitrage,” before that was even a term . Yet, his strategy for entering the market was so simple that he could enter orders from anywhere in the world his dancing profession took him.
All he had to have was access to a telegram service. From there, he’d wire his orders to his broker.
To learn more about Nicolas Darvas check out his Wikipedia page.
What is a Darvas Box?
The Darvas box is a trend following system. A trend following system is one that does not try to anticipate a market move. Another way of saying this is that the system is reactive versus predictive.
Darvas would only enter stocks that were in confirmed uptrends and breaking out of consolidation patterns to make new highs. His boxes helped him visualize this while he was on the road dancing for a living .
Essentially, if a stock on his watchlist was bouncing around inside a “price box” of say $35 and $40, then he knew if it broke to $40.50, it was time to buy.
Likewise, if the stock retreated back into the box, it hit his stop loss orders. He wanted to make sure the uptrend was confirmed with higher prices.
Darvas Box Rules.
Darvas’s rules were fairly simple, as stated in his book How I Made $2,000,000 in the Stock Market . You can find his book on any digital platform. Again, it’s a quick and fascinating read and worth your time.
Okay, back to the rules.
A stock is making a new 52-week high After the high is set, there are three consecutive days that do not exceed the high The new high becomes the top of the box and the breakout point leading to the new high becomes the low of the box Buy the break of the box once it exceeds the high by a few points Sell the low of the box if it is breached Add to your position as it moves into each new box.
This sounds like a lot, but it’s honestly straightforward. You have 7 steps which prescribe how to find the stock and also provides entry and exit criteria.