Read my review

Nicolas Darvas

Read my review of his book here.

First things first. Notice that his name does not have an 'h' in it. It is not Nicholas Darvas. I'm not sure why people insist on spelling it Nicholas, but as you can see from the cover of his book, it is in fact Nicolas. Please get that right.

Anyway, Nicolas Darvas was a dancer. He's known for many things, but what concerns us here is his stock trading system. He invented a trading system while traveling the world, using Barron’s as his source of information and telegrams to give his broker instructions. In his book he recounts how he once had to explain to some very curious authorities what his telegrams really meant (was Darvas a spy… or just some nut?).

Using his box method, Darvas made over $2,000,000 in about 18 months. Keep in mind: this was in the late 1950’s! In today’s dollars (at 5% annual compounding), he made over $20,000,000. That system, the Darvas box theory, relies on a very simple technical analysis idea.

The Darvas Box Theory

The Darvas box theory, or Darvas box method, or Darvas box system, relies primarily on one technical indicator. A Darvas box is an area of price consolidation wherein the stock treads over a long period of time. For example, imagine a set of toothpicks lined up in a row. Now, each toothpick is a different length, and represents the trading range for the stock in any given week. The idea behind the Darvas box system is that when we line up all these toothpicks, we can easily draw a horizontal line at the top and the bottom of the toothpicks, which represents the support and resistance lines. The premise behind the Darvas box system is that when the stock breaks out above the top of the box, it triggered a buying opportunity.

One caveat of course is that when Darvas used his box method, he was in a very strong bull market (not unlike what we have experienced since 2003). The moral of this story is that one should only apply the Darvas box system in a bull market (or maybe even a sideways market).

Can Darvas’ box method be used today? This is a loaded question. Believers in the strong form of Efficient Market Hypothesis will tell you that neither fundamental nor technical analysis works, yet there are entire industries built around both methods. I think traders should not ask, "Does it work?" But rather, they should ask: "Can I make it work for me?" After all, Warren Buffet has proven fundamental analysis works wonderfully, but that's not to say he'll share any profits with you if you agree with him (unless you are a shareholder in which case the price appreciation is his way of thanking you).