Overview
The notes summarize the Darvas Box Theory, its origin, trading methodology, and practical application for trend identification and trade management, highlighting key rules and examples for implementing this approach in long-term trading.
Origin of the Darvas Box Theory
- Created by Nicholas Darvas, a dancer with no initial trading background.
- Darvas began trading in the 1960s, turning $10,000 into $2 million using his theory.
- His journey and method are documented in his book, "How I Made $2,000,000 in the Stock Market."
Core Concepts and Philosophy
- Focuses on rule-based trading, avoiding random or impulsive trades.
- Rejects "buy low, sell high"; instead, buys only after confirmed upward momentum.
- Waits for stocks to break out from consolidation, then enters trades.
- Adds to positions (pyramiding) as the stock continues in the breakout direction.
- Exits when the price falls back below the consolidation (“box”), limiting losses.
Darvas Box Theory Trading Rules
- Identify stocks making a new 52-week high on high volume.
- Wait for a retracement and consolidation phase after the breakout.
- Draw a “box” around the consolidation area, marking resistance and support.
- Place a buy order above the box (resistance) and a stop-loss at or near the box’s support.
- Enter the trade only on a confirmed breakout above the box.
- If the breakout fails and price returns to the box, exit the position.
- Pyramid into the trade as the stock makes subsequent breakouts.
- Do not enter on the first breakout; wait for double confirmation via consolidation and re-breakout.
Practical Example and Application
- Example given using BSE stock illustrates box formation, breakout, and pyramiding.
- Buy on breakout above the box with high volume; exit if price returns inside the box.
- Hold trades and add positions during the uptrend, exit on breakdown below box support.
Money Management and Risk
- Initial risk is small due to tight stop-loss at the box's lower end.
- Rewards can be significantly higher (e.g., risk:reward of 1:14 cited).
- Increased position size only when in profit (“pyramiding”).
Recommendations / Advice
- Read “How I Made $2,000,000 in the Stock Market” by Nicholas Darvas for a complete understanding.
- Apply rule-based setups and strict money management to improve trading consistency and reduce random losses.
Questions / Follow-Ups
- For further clarifications or doubts, contact the speaker for more details.