Darvas Box is an indicator with a story to tell. It was invented by a ballroom dancer and self-taught successful investor, Nicolas Darvas. Trained as an economist, Darvas pursued the career of a dancer but spent most of his spare time reading books on investing and finance. Eventually he developed an approach of his own. He built a fortune and published a book called “How I Made $2,000,000 in the Stock Market”, in which he explained his approach to trading. The strategy will especially suite those who enjoy stock trading. Let’s have a closer look at this strategy to understand how and when it can be applied.
How it works?
Darvas Box is a momentum strategy which uses a very particular technical analysis tool to determine optimal entry and exit points. The idea behind Darvas’ strategy is both simple and elegant: the trader should consider buying a stock that crosses above the upper (green) line of the existing box. But, of course, the entire strategy is not as simple as that.
The entire strategy is focused around stocks that show consistent upward movement and is mostly built on technical analysis. Nonetheless, Darvas would also implement elements of fundamental analysis in order to decide which stocks to choose. He favoured stocks with growing volume, which is in itself a reliable indicator of the upcoming upward movement.
Note that there are no SELL orders when working with the Darvas Box strategy. All stocks that leave the box in the downward direction are not traded.
How to trade?
The indicator is created by the lines that are being drawn along the highs and lows of the price during a particular time period to make it look like a box. All boxes are created automatically by the indicator itself. The boxes will go up when the price continuously reaches new high or down when the price reaches new lows.
Darvas himself would enter the market at the moment of the price moving to a new rising box and set a stop-loss at the level of the upper line of the previous box. Trailing stop is of great use in this strategy, as it allows your stop-loss level to follow the price.
Here is an example that will help you better understand the basic principles behind this strategy. If the asset price fluctuates between $55 and $60, it creates a box. If the price moves higher, say, to $60.50, a new, higher box is created. In this case Darvas would enter the market and set the stop-loss just below the upper line of the previous box. He assumes that once the box is broken, the price is heading towards the new box. If the price starts to go south, the deal would be closed.
Of course, as any strategy, the Darvas Box strategy does not provide accurate signals 100% of the time. Darvas himself emphasised the importance of a trading journal, where you keep a record of all your deals. It is important to learn from mistakes you make and analyze your past trades.
You may combine the Darvas Box indicator with volume indicators, such as Volume Oscillator to increase the accuracy of signals you receive.
How to set up?
Now that you know how to read the indicator’s signals, you are ready to apply it. You can find Darvas Box in the ‘Trend‘ tab of the ‘Indicators‘ menu.
It may be a good idea to try the Darvas Box strategy on your practice account before you switch to the real one. See if it suits you and do not forget to keep track of your investments.
