The Darvas Box Trading Method
The Darvas Method is my favorite trading method. It involves the use of a unique setup that integrates a volume spike with a rising stock price into a powerful trading system that incorporates entry timing, stop loss placement and exit timing. It is the creation of the legendary trader Nicolas Darvas in the 1950’s and is used to capture long term growth of leading stocks in the strongest industry groups, particularly those companies involved in innovative product developments.
For a stock to qualify as a potential Darvas trade, it first has to exhibit a proof of changed behavior in the form of a recent volume change of at least a 400% increase compared to the average daily volume for the past few weeks. The stock must also be rising in price and make a new yearly high. The Darvas Box upper and lower boundaries will then form if this high is not touched or penetrated for the next 3 consecutive trading days followed by a retracement low that’s not touched or penetrated for a further 3 days in a row, as shown in the picture above. Darvas tells us that sometimes the top and bottom of the box may form on the same day. In such a case, the requirement is that neither the high nor the low of that day are touched or penetrated for 3 consecutive trading days.
Once a box forms, a buy stop order is placed to purchase the stock the moment it pushes through the top of the box. At the same time, an automatic stop loss order is entered just below the bottom of the box to protect the position. As the prices increase and new boxes form, this stop loss is trailed just under the bottom of each new box to lock in the profits. One aspect of this trading method that made Darvas so successful is the pyramiding of position by buying more stock on the breakout of subsequent boxes – a very powerful technique to maximize returns in a winning trade.
The Darvas Method works in today’s market just as well as it did in the 1950’s. It will lead to profits substantially faster and more frequently in a bull market than a bear market, but will also let you identify and profit from stocks that stay strong in sideways or bear markets.
When trading Darvas, one trails the stoploss a fraction below the low that marks the bottom of each new box to lock in the gains until stopped out.
Trading tip - Do not be afraid of getting stopped out! Many times, Darvas would be stopped out for the sake of a point just to see the stock climb up immediately after. But he realized that this was not as important as protecting his position and profits! If sold out, consider buying the stock back on the break of a fresh new high.
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