Stock Trading System - How Nicholas Darvas Made $2.5 M With His Darvas Box System?

Nicholas Darvas loved beautiful women and stocks

. He was a prpfessional ballroom dancer who would trade stocks part time as a hobby. He was smart and dashing. Those were the last few years of 1950s. He would sit in the night and study stock chart patterns. One night, he made a startling discovery. He had discovered the famous chart pattern now known by his name as the Darvas Box. He started trading stocks using his Darvas Box Trading System and turned $25,000 into $2.25 Million in just under 18 months. A remarkable feat keeping in view the fact that he was neither a stock broker or an investment banker. He was just a part time stock trader. The story spread like wildfire. Time Magazine checked and double checked the story and eventually decided to make Nicholas Darvas the cover story.He was a ball room dancer who would be busy all day at Broadway. He had to made frequent dancing tours to Europe and other parts of the world. So, he would sit in the night for two to three hours and analyze stocks that he could trade. Ultimately he developed his famous Darvas Box Trading System.Darvas Box is based on the observation that security prices tend to trade between two levels before breaching a level and rallying or falling. This is what is known as the accumulation phase or the consolidation phase in the market.Darvas would only trade those stocks that would trade between the two clear support and resistance levels. You would ask what is support and resistance. Support and resistance is a very basic concept in trading. Everyday, you will keep on hearing about the support and resistance. Support is the price level around which buyers feel that the stock price is cheap. So they jump into the market and start buying the stocks. As more and more peopl start buying the stock, the stock prices stop moving down and start to climb up again. On the other hand, resistance is the price level around which sellers think that the stock has become overpriced and they should immediately sell it and take profit. So they start selling the stock. This selling pressure eventually reverses the upward movement in the stock price and the prices start to fall again until they reach the support level where buyers again step in.This to and fro movement between the two levels continues until the fundamentals change and new support and resistance level is established.Darvas would not waste time with securities that did not fit nicely into this mold. After identifying a security as trading between the two price levels, Darvas would patiently wait until the security price broke out of the upper band on heavy volume. Darvas would buy then placing a stop loss just below the support level of the rectangle formed by the support and resistance levels.Now, if the stock prices kept on moving up and made another rectangle eventually trying to digest and consolidate the recent gains in price. Darvas would replace the stop loss and move it below the new support level formed. Now, a Darvas Box can work in the reverse when the breakout in prices is to the downside. When the breakout happens to the downside, short selling is done. When a stock is trading between two horizontal levels and the stock price eventually breaks out to the downside, short sellers do the exact opposite of the buyers.Short sellers place the first stop, right above the support level. If the security forms a new lower Darvas Box, short sellers move that stop loss to an area slightly above the new resistance level. Darvas was not a swing trader. His time horizon was much longer so he would wait for the new consolidation in the security price.


Stock Trading System - How Nicholas Darvas Made $2.5 M With His Darvas Box System?

By: Ahmad Hassam

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