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Applications of Darvas Box Theory

Given that the Darvas box theory is just a technical indicator, applications are endless. In particular, the Darvas method can be applied opposite to what Darvas originally designed it: to short stock. It is true that Darvas himself never shorted stocks, but that’s not to say we can’t do it now, especially since transaction costs have dropped significantly and the internet makes gathering information and keeping up to date an easy task. Of course, the trend is your friend, so it is unwise to short in a bull market.

Another, and arguably less risky, application is to the realm of stock options. The beauty behind buying stock options is the limited risk and the leverage. The risk is limited only to the amount put into buying the options (that’s the obvious part). The not so obvious part is the leverage. When we buy an options contract, we are buying the right to control 100 shares of whatever stock the option is written on. In most cases, it costs much, much less money to hold the contract than the equivalent 100 shares. For example, 100 shares of Decker’s Outdoor would cost us almost $16,000 as of this writing. However, an at the money call option would only cost $2,100. Yes that’s still a lot of money, but it’s only 1/8th of what it cost to own the stock outright.

By combining the Darvas box theory with stock options, one can be both long and short (at the same time, if desired). In this way we have infinitely more possibilities for gain (and loss) than Darvas ever did. There's a lot of basic and background information about stocks options on this site. I suggest you read some of it if you are interested in using options with the Darvas box theory method. Conversely, you can just go straight to it. Let me know if you have any questions or comments about my approach to this wonderful and profitable trading system.

Finally, I recently discovered that applying the Darvas box theory method to foreign exchange (forex) is also possible. The FX market tends to trend a lot, and offers plenty of opportunities to find consolidation and breakout. The really nice thing about forex is that most brokers let you put in orders on both sides (long and short) at the same time, so you get the benefit of straddling (as with options), but it doesn't cost you any more (since only one order will execute, unless you whipsaw).

Be sure to discuss more about applications in the new forum.