Darvas Box – Trend Following System for Any Time Frame
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Looking to learn about the guy who was able to turn a few grand into over 2 Million while traveling the world and with no internet access?
Well, get ready to read about one of the most fascinating trader stories ever documented.
Who is Nicolas Darvas?
Nicolas Darvas was a professional dancer that traveled the world with his sister in their own dance company in the 1950s. Nicolas became obsessed with the markets and put countless hours into the study of market movements and internal mechanics. It's really fascinating to think that he was able to teach himself how to trade the markets just by reading books.
To learn more about Nicolas Darvas check out his Wikipedia page.
What is a Darvas Box?
The Darvas box is a trend following system. A trend following system is one that does not try to anticipate a market move. Another way of saying this is the system is reactive versus predictive.
Darvas Box Rules
Here is my crack at documenting the Darvas box rules as stated in his book "How I Made $2,000,000 in the Stock Market." You can find his book on any digital platform and I recommend you start reading today.
Okay, back to the rules.
- A stock is making a new 52-week high
- After the high is set, there are three consecutive days that do not exceed the high
- The new high becomes the top of the box and the breakout point leading to the new high becomes the low of the box
- Buy the break of the box once it exceeds the high by a few points
- Sell the low of the box if it is breached
- Add to your position as it moves into each new box
This sounds like a lot, but it's honestly straightforward. You have 7 steps which prescribe how to find the stock and also provides entry and exit criteria.
How to Draw a Darvas Box
I feel so bad for Nicolas because during his day he did not have a computer. Nicolas had to rely on data from newspapers and needed to manually track his trades after the market close later that day or even the next morning when he could get his hand on a paper.
Thankful for us, we live in a time where computers do all of the heavy lifting for us.
Within Tradingsim Darvas is one of our standard indicators which you can select from our list of studies.
Darvas Box Settings
Darvas used three bars consolidating under the high to construct the box. However, you can now configure the boxes to your liking with a few clicks of the mouse.
So, why do we need these settings and offsetting levels? Simple, traders have a tough time surrendering to any method without adapting to the original technique.
For example, Darvas clearly says buy the new 52-week high, so the look-back period is honestly irrelevant. Do what feels right to you, but I would recommend you stick as close as possible to Darvas' original intent to see what part of the strategy works for your trading style.
Where Darvas Works the Best
Without a doubt, the Darvas box strategy works best in strong bull markets. The market just goes higher and you just keep buying the strength. If you are swing trading, you can catch the right symbol and things can get out of hand quickly.
The hard part though is finding, buying and managing these homerun trades.
Example of Darvas Box Working
Above is a weekly chart of the Diamonds which is an ETF that mirrors the movement of the Dow Jones. There were three clear long entries. You would have added to your position at both the second and third breakout zones.
There is also a spot on the chart which says no entry. This is because the breakout was not convincing and Darvas requires the price to leave the box by a few points. Darvas avoided placing trades when a security was only able to slightly tick over the most recent high.
Do you see how by adding to your position and letting your profits run, you are able to reap significant rewards?
Now let's review the hard part of the system, which requires tremendous discipline. The ability to not only pick the right stock but to also understand when market conditions are ripe.
Risks of Trading the Darvas Box
The Darvas box can put you in a tight spot under the following scenarios:
- Buying breakouts into stocks that are near 52-week lows
- Buying breakouts during bear markets
- Scaling too heavily when adding to your position
- Using the Darvas Box within sideways markets
- Ignoring Your Stop Levels
Ignoring Your Stop Level
There aren't many examples on the web discussing the issue of not honoring your stop levels when trading Darvas boxes.
Let's say you were able to ride CIFS up and you also were adding to your position as the stock went in your direction. Then the inevitable happens, the stock breaks major support.
By not honoring the stop, you actually could end up in a catastrophic situation. Remember, you are trading stocks that are trending strongly, so when things go wrong, they go horribly wrong.
Sideways Markets Hurt Darvas Traders
Sideways markets can drain you dry using the Darvas box method. This is because you will find yourself buying the breakout and then consequently selling the breakdown at the bottom of the box.
In the above stock of CDEV, the first breakout felt like the start of a new trend. Well, each signal thereafter would have taken you on a one-year grind of wasted time and high commissions.
The market only trends about 20% of the time, so determining when the market is in a strong bull trend and more importantly the sector you are trading should also be outperforming.
Can you Day Trade with Darvas Boxes
Darvas boxes can work on any timeframe. So, yes you can day trade with the Darvas Box. However, you will need to define your look back period. This will allow you to collect trade data, so you can begin to assess the right configuration.
For example, Darvas stuck to new 52-week highs with three consecutive bars below the high to establish a new box.
You will need to define similar parameters for yourself that work, so again you can begin the process of figuring out what works.
How Can Tradingsim Help?
All of the above examples were taken directly from Tradingsim. You can use Tradingsim to practice your strategies using the Darvas box. You can also test Darvas' original strategy using daily and weekly bars.
If you are more interested in day trading with Darvas boxes, you can test out the system with a number of intraday timeframes.