PostHeaderIcon The Darvas Box

The Darvas Box is a strategy in stock trading that was developed by Nicolas Darvas in 1956. What makes this quite a unique strategy is that it was developed, not by a financial or trading expert but by a popular former ballroom dancer. Yes, Nicolas Darvas was a former ballroom dancer who was famous dancer all over the world in the late 1950’s. But with his strategy, he was able to turn a $36,000 investment into more than $2.2 million in a span of three years.

The Darvas Box involves buying stocks that are trading in new 52-week highs with corresponding high volumes. A Darvas Box is said to be created when a price of a stock rises higher from its previous 52-week high and then falls back at a certain price that is not high from the said high. When the price falls too much, then it may signal a false breakout. But barring any false breakouts, this trading technique sets the lower price as the bottom of the box while the high is considered as its top.

Darvas started trading in stocks while still a famous dancer in the 1950’s. During that time, stock trading was not as convenient as it is today, with brokers being paid high commissions. That is why traders looked upon buying high quality and dividend paying stocks and considered it the most sound trading philosophy. But identifying what these stocks are may take some bit of technique.

In order to identify good stock investments, Darvas looked into stocks from industries that he thought would do very well in the next 20 years. He also thought from previous knowledge that he will profit greatly if he can anticipate the next big thing in stocks. Darvas began to create a watch list of stocks from different industries. He focused on higher priced stocks because during that time, the cost of trading declined as the price of stocks increase.

With the list, Darvas then looked upon the stocks on the list that are ready to move. He did this by looking at the volume being traded. When he saw a day when an unusual volume of stock from his list was being traded, he called his broker and asked for daily stock quotes. Darvas was interested on stocks that was trading on a narrow price range. The upper limit of the said range was the highest price that the stock has reached in its current advance that was not yet reached for at least three days. The lowest limit in the range was the recent three day low of the stock price that held for at least three days.

When such a range on a stock has been found, Darvas then would contact his broker with a buy order just above the top of the trading range he set and a stop-loss order at somewhere just below the bottom range. Darvas saw that stocks set on his technique seem to pile up in boxes based on the narrow price range set. As these boxes pile up, a new box pattern is being formed as the stock price climbed higher. Each time a new box is formed, Darvas then raised his stop-loss order a fraction below the new bottom of their trading range.


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