Nicholas Darvas loved beautiful women and stocks. He was a professional ballroom dancer who would trade stocks part time as a hobby. He was smart and dashing. Those were the last few years of 1950s. He would sit in the night and study stock chart patterns. One night, he made a startling discovery. He had discovered the famous chart pattern now known by his name as the Darvas Box. He started trading stocks using his Darvas Box Trading System and turned $25,000 into $2.25 Million in just under 18 months. A remarkable feat keeping in view the fact that he was neither a stock broker or an investment banker. He was just a part time stock trader. The story spread like wildfire. Time Magazine checked and double checked the story and eventually decided to make Nicholas Darvas the cover story.
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He was a ball room dancer who would be busy all day at Broadway. He had to made frequent dancing tours to Europe and other parts of the world. So, he would sit in the night for two to three hours and analyze stocks that he could trade. Ultimately he developed his famous Darvas Box Trading System.
What is a Darvas Box? Darvas box is based on the observation that stock prices move to and fro between two levels before breaching a level and rallying or falling. Now, these two levels are the support and resistance levels and the market moves between the horizontal support and resistance levels when it is in consolidating phase or accumulation phase. Even during a long term trend, market tend to take rest, consolidate and accumulate before they move on.
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Now Darvas would look for securities that would trade between two clear price levels also known as the support and resistance levels. Support level is the price level at which buyers step in and start buying preventing the security price to going down further. Resistance level is the price level at which the sellers step in and start selling the security preventing the security price to going higher.
Now Darvas would only choose those stocks that would be trading between the two levels for days and would simply ignore those stocks that did not fit nicely with his Darvas Box Pattern. Darvas would wait for the stock price to breakout from the resistance level. If he found such a breakout acompanied with heavy volume meaning that the movement had momentum, he could buy the stock and place a stop loss just below the support level of the rectangle formed by the two horizontal levels.
If the security price rose further and made a new rectangle, he would raise the stop loss level to the area below the new support level. A Darvas Box works in reverse too when the security price does down instead of up. When the security price goes down, short sellers do the exact opposite of the buyers. They spot a security trading between the two levels and only short a security after it breaks the lower support level.
The first stop is place right above or close to the support level by the short sellers. If a new Darvas Box is formed by the stock, short sellers move the stop loss slightly above the new resistance level. Eventually trading with his Darvas Box System, Nicholas Darvas made a fortune. Darvas was not a swing trader. He would patiently wait for the breakout to take place before placing a long or short order. His time horizon was longer and he would patiently wait for the new consolidation and accumulation in the stock price action before closing his trade.
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