Darvas Box Theory and Strategy Guideline (PDF)
Darvas Box is a trading strategy originating from the professional trader and dancer Nicolas Darvas. Nicolas Darvas created this box theory while traveling, using only newspapers. Thanks to his DB, he reportedly transformed a few thousand dollars into two million dollars. The strategy consists of buying stocks that achieve new highs, and then, a box is drawn around the latest highs and lows, forming the famous Darvas Box. Accordingly, this provides investors with entry and exit points.
What is Darvas Box Theory?
The Darvas Box theory is used to react to markets, and not to anticipate markets, these two approaches differ. That is to say, the Darvas box presents a trend-following system and not a trend anticipation system, which means that based on this theory like down jo, we will only react to the price action. The DB focuses on the use of volume and price simultaneously. To explain, price highs and lows create the Darvas Box, with the recent high acting as the top side of the box, and the recent low acting as the low side of the box. Also, the volume aims to confirm buy or sell signals.
The time frame used to draw the Darvas boxes is the 52-week high, which means that the highest price in the latest 52 trade weeks, will make the ceiling of the box. In addition, the application of DB has a set of rules, that we should respect in order to have successful trades.
Origin of the theory
Nicolas Darvas was one of the most famous, and highest paid dancers in the industry. While in the middle of a tour, he decided that he should invest his money in financial markets, and he made the right decision because he became a wall street celebrity. Darvas was buying and selling stocks using only journals and newspapers to collect information. Also, he used to send letters to contact his broker. Using his method. Darvas focused only on trading stocks and especially stocks with high growth opportunities. Actually, he transformed a $36000 investment into $2 million dollars. All of the details relative to his story appear in his self-written book “How I Made $2 Million in the Stock Market”
What is Darvas Box Trading Strategy ?Like any other Spread betting strategy, the DB has its own rules narrated by Nicolas Darvas in his book. We have 6 rules which are the following:
- We need to look for securities that are achieving their 52-week high.
- After identifying the 52-week high, the price of the security must not achieve a new high for the next 3 days.
- The identified high price is now the upper part of the DB, and the price that was broken to achieve this new high is now the bottom part of the box.
- The bottom part of the Darvas Box must not be broken for three consecutive days.
Darvas Box trading example
The first step in using the DB is to draw boxes on our main chart. We can draw these boxes by identifying the 52-week high that won’t be broken for the next consecutive 3 days. Furthermore, this high presents the ceiling of the box or in other words, the resistance level. Also, the previous 52-week high now presents the support level or the bottom part of our DB. Traders can use custom forex indicators to draw the boxes for them.
For example, if the price of a stock reaches 50$, then goes down to 15$, then climbs to 25$, the box would be between the 50$ and the 15$ level. The trader would now look for opportunities when the price breaks above 50, or below 15. If the price breaks above resistance, the trader should enter a long position as the price will probably keep increasing. Accordingly, if the price surges above the support, the market becomes bearish and the price will probably keep falling. This is a Tradingview example of the Darvas strategy.
As we can see, the green circles contain bullish candles that have broken above the ceiling of the Box, which triggers a Buy signal as mentioned on the graph. On the other hand, the red candles inside red circles have broken below the support level or the bottom of the box, which is a sell signal. In this graph, the period of Darvas Box was 5 days. That means that the top of the box was the 5-day highest price, unlike the classic 52-day mentioned in the original book. Bigger timeframes provide better and more accurate signals.
Risks of Trading with Darvas Box
The DB Theory has a few flaws that need to be addressed. For starters, it’s a growth stock trading technique. Mature corporations frequently trade at a slower pace, allowing them to go beyond the DB’s support and resistance levels without generating considerable volume. Growth firms, on the other hand, have more boom-and-bust potential, as evidenced by large-volume breakouts. Another criticism of the Darvas Box Theory is that it works better in bull markets than in bear markets and also better than the dow theory. Darvas built the model during a bull market, which validated his idea; nevertheless, investors in bear markets haven’t always repeated his results. Short-selling with a Darvas Box is doable but is very risky.
The Darvas box is an easy indicator and beginner-friendly. Traders apply this indicator to detect buy positions and exit positions. Buy signals occur when the upper box is broken, and sell signals appear when the bottom of the box is broken. Darvas Box is an application of broken S&R.