Darvis Box

In this overview we will be looking at the Darvas Box technique. This technique was developed in 1956 by Nicolas Darvas. It is said that using his technique turned $10,000 into $2,000,000 in around 18 months. The Darvas technique is quite simple to use, and today we will be briefly go through the basics of it and then look at a practical example.

Nicolas Darvas was a dancer who was on a world tour while he was trading stocks. He began by first defining what type of stocks he would trade. He only traded stocks that were performing strongly and operated in industries with good growth potential. Darvas always used stop losses while trading his method. Furthermore, Darvas only traded stocks that traded at their year highs, had large volume spikes recently and doubled in price in the last twelve months.

The construction of the Darvas box is very simple. The box top would be defined as the new year high. The box top would only be confirmed if the stock did not pass the highs for the following three trading days. The confirmation of the box lows would only occur if the price did not go lower for the following three trading days. After the share price had traded in this range the Darvas Box high and low would be confirmed. Once this occurs, the entry level would be new highs and the stop level would be the box lows.

In summary, Darvas would only buy on break outs, set the initial stop level at the box lows. Once he has entered a trade and a new box is confirmed he would raise the stop to the new box lows.

Example

The chart below is of CSL Ltd. Each entry level is numbered as is the corresponding stop level.

As you can see in the above chart CSL would have been a profitable trade using this technique over the last few months. The only loss making trade would be entry number 2. Many using this technique would not have entered at trade entry number 2 due to the nonexistence of any spike in volume. The rest of the entries would have profitable. CSL also satisfies Darvas' other entry criteria of the share price reaching yearly highs however the price hasn't quite doubled in price.

It should be pointed out that one of the major criticisms of this technique is that many state that in can only work in strong bull markets and that if the market is bearish or trading sideways this systems doesn't work.