Applying Nicholas Darvas’s trading principles to Indian equity markets
“Long before the internet provided real-time stock quotes and online brokers offered instant fills, Nicolas Darvas managed to grow a $36,000 investment into more than $2.25 million in a three-year period. While on a worldwide dance tour in the 1950s, he relied solely on Barron’s, a weekly newspaper, and telegrams to his full-service broker to get quotes and place orders. Although Darvas developed his stock selection techniques many years ago and in a different investing environment, his strategy has withstood the test of time and is a tool that every modern day trader should consider adapting.” – Investopedia
If you are a stock trader, you need to read this amazing book How I Made 2,000,000 in the Stock Market by Nicholas Darvas on his trading styles and how he made 2.5 million dollars in span of three years. From making novice mistakes to taking astounding profits this book is quite a roller coaster.
I have used the below example of CARE ratings a stock listed on NSE and BSE to elucidate how Darvas’s box theory holds good in current times.
How Darvas used to identify a stock to trade
I decided that if a usually inactive stock suddenly becomes active I would consider this unusual and if it also advanced in price I would buy it.
How Darvas would develop his boxes
Stocks would oscillate fairly consistently between a low and a high point. The area which enclosed this up and down movement represented the box or frame. These boxes have to be identified
To decipher – The boxes of a stock in which I was interested stood like pyramid on top of each other and my stock was in the highest box, I started to watch it.
When to Buy
Firstly when usually volume is seen with spike in prices, if trader misses out than, Logically it was the moment when it entered a new higher box
However identifying the stock and box is not enough, Darvas talked about using below as weapons while trading
1.Automatic buy order – This is will ensure that you will not miss out once the stock crosses from one box to another
2. Stop loss sell order – Most importantly on every move you have to move your stop loss that will ensure that if the trend in stock reverses you book profits and exit market
In essence Darvas’s stock theory can be summarised on four principles
Why his theory works
Markets still reflect the emotions of traders, just as they did when Darvas was studying them and, therefore, classic methods can work effectively, if applied with discipline.
Now that you have understood how the Darvas’s box theory works, I would highly recommend to read the first few chapters of the book where he explains how he made countless mistakes before perfecting this art and making money. I am sure all amateur investors like me would relate to his life story.
Do you have any investment or trading questions ?
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