Trading Stocks with the Darvas Box Strategy
5 min read
The Darvas Box trend indicator is one of the numerous new indicators on our platform, but it has a whole story behind it. 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 free time reading books about investing and market and eventually came up with his own approach. He built a fortune and released a book all about the method he applied. Let’s have a closer look at this strategy to see how it can be applied.
How it works?
The Darvas Box is a momentum strategy which uses technical analysis to determine the entry and exit points of the market. The idea that Darvas had is to buy stocks that are trading at new highs and create a box around the recent highs and lows to determine the entry to the market and the stop-loss level.
As you see, the whole strategy is focused on stocks that show growth and move up. The approach is mostly built on technical analysis, however, Darvas would also implement features of fundamental analysis to decide which stocks to choose. He favoured those with growing volume, which indicates that the stock is headed towards a strong increase.
How to trade?
The indicator is created by drawing a line along the highs and lows of the price to make a box. The boxes are formed by market forces and as the price rises or drops over time, you will see rising or falling boxes accordingly.
Darvas 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 ceiling of the previous box. Trailing stop is of great use in this strategy, as it allows your stop loss level to follow the price of the asset up.
For instance, if the price is fluctuating between $55 and $60, it creates a box. If the price moves up to the level of $60.50, that means that it broke the box and moved to a new, higher box. In this case Darvas would enter the market and set the stop loss just below the ceiling of the breached box, as he assumed that once the box is broken, the price is headed towards the new box. If the price started falling instead, he would exit the trade.
Of course, as any strategy, the Darvas Box strategy does not give 100% results. Darvas himself indicated that keeping a record of all deals is crucial for a trader. It is important to learn from the mistakes you make and analyze the trades.
You may combine the Darvas Box indicator with indicators of volume like the Volume Oscillator to get a more precise signal.
How to set it up?
Now that you know how to read the indicator’s signals, you are ready to apply it. Find it in the list of Trend indicators on the platform.
You may try out 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.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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