Darvas Box Captures Elusive Returns

The Darvas box strategy is a trading strategy that has withstood the test of time in the investment world. This strategy is based on the observations and trading methods of Nicolas Darvas. Darvas traded before the days of instant stock quotes and online trading, but he was able to have a great deal of success with his Darvas box strategy. Here are the basics of the Darvas box strategy.

Nikolas Darvas

Nikolas Darvas, a professional dancer, was deeply involved in the stock market. He utilized a weekly newspaper and stock quotes that came from his stockbroker via telegrams. Even with these limitations, he was able to take an investment of about $36,000 and turn it into a portfolio of over $2 million within three years. His accomplishment was nothing short of amazing, and many traders have emulated his strategies since that point. The strategy that he primarily used was called the Darvas box. This was basically a technical indicator that he used to help select potential stocks to invest in. Once he identified stocks with this strategy, he would do fundamental research about the company to confirm his selection.

Darvas Box

The Darvas box is basically a rectangle that is placed on a stock chart. By looking at the stock prices, one can tell where the prices are closing for the day. If the stock prices traded within a narrow range for at least three weeks, they could potentially fit inside this Darvas box. If this is the case, the stock becomes a candidate for purchase according to the method.

When the price of the stock breaks out above the upper edge of the rectangle, a trader should purchase the stock. At that point, the stock will generally move up in price, and the trader can make some profit.

After a certain amount of increases, the stock will begin to level off again. Another Darvas box can be drawn on the chart when the stock remains close to the same price for at least another three weeks. After the stock is inside the second box, the trader should sell the shares when the price of the stock falls below the bottom edge of the second box. 

Entry and Exit

The good thing about this trading strategy is that it attempts to provide clear entries and exits for traders. Many traders have trouble determining when to get into and out of the market. With the Darvas box strategy, this is not the case. When you are looking at a potential candidate for this strategy, you need to make sure that the ranking stock price fits nicely within the Darvas box. If there is any question as to whether the stock fits into the category, you need to forget about that stock and move on to another one that can be clearly seen.

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