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How to make money using the Darvas Box

  1. arthur

    7,396 Posts.

    Arthur is sitting in his office and doing some research,

    I notice Hotcopper is a bit quiet so we will pop this up ,

    You may find it interesting ,I had better hurry and post it asI can see Remmy comming into the room ,
    he will have something to say .


    The Darvas method uses the 4 day volatility of a stock to capture the upward momentum of a trend.
    The rules are simple and can be done without software, live subscription data, or live screens.

    The original inventor was a Hungarian dancer who made Millions of dollars trading from anywhere in the world. He used newspaper reports and a phone thats it.

    The rules are:

    Find stocks that are trading at their 12-month high, these can be found in the financial review under the rolling year records section
    Then note this price level along with the low down on a scratch pad and monitor it daily.

    Then what we must have is three consecutive lower highs, if the high goes higher than the initial yearly high, the calculation starts again.
    This confirms the highest high as the top of the box.

    Now we find the lowest low within this time frame and use this as our pivot point low, and we must now get at least two consecutive higher lows, they dont have to be higher than each other, just higher than our pivot point. If the low goes below our pivot point, we start the low calculation again.
    We now have the bottom of the box set. This will be our stoploss level for our initial parcel size calculations.

    We now put this on our alert list and watch it until it trades above the top of the box. We can just keep watching the papers if we like and wait for the breakout and enter the next day, or give the trigger price to our broker to monitor.

    Once we are in the trade we can keep watching the yearly highs each time they are set, and do new calculations for each new box. This way we can move our stop along with the ever-changing volatility of the market.

    If we find the bottom of the box is to wide, and will leave us open to giving away profits, we can use a fixed dollar stop i.e. close trade when it falls $X, an amount we are comfortable with or we can use the lowest low of the past 10 days, we would have this figure written down on our scratch pad if we are in the trade.

    If after the top and bottom of the box is set, the low trades through the bottom of the box, we take the stock of our watch list and wait until it appears on the new yearly high list again.

    This is a simple technique that is making good profits, by keeping us in the trend and utilising the volatility as well.
    This is best suited in a rising market, but there are plenty of examples that are bringing profits in this bear market.

    By keeping our losses low and our winners large we will win in the long run.

    Volume is a good partner to have when weeding out the new yearly high stocks, as low liquidity is not good, especially in a bear market, we want to be where the money is.

    The original does say that a new 12 month high must be set, but this was only the criteria, because Darvas didn't have access to live data, only newspapers and his broker by phone.
    I have found that it does not really matter what time frame you use, as long as the Darvas rules are adhered to, you will catch the rising trend and stay with it until you are stopped out.

    I prefer to use 100 day high in a bear market as this is the average time fram that a stock will form its bottoming pattern.
    You can go as low as 60-80 days in a bull market, as stocks tend to get lifted with the outer market forces.

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