Darvas' Trading Strategy Theory
In the 1950s, a groundbreaking story unfolded in the world of finance, one that would redefine the way investors approached stock trading. This story was told in the book 'How I Made $2,000,000 in the Stock Market' by Nicolas Darvas, a Hungarian dancer turned self-taught investor.
Darvas was one of the first mechanical system traders, and one of the first trend followers in history. He developed the 'Box Theory' for stock trading, a method that focused on price action rather than fundamentals, predictions, or opinions. This theory allowed him to identify stocks breaking out on strong volume, set stop-loss orders, and capitalise on potential insider trading signals.
The Darvas Box Theory was a revolutionary approach to trading. It involved creating trading ranges within a box-like structure, and making trading decisions based on when these boxes broke out or broke down. Darvas also used buy stops and trailing stops in his trading strategy, allowing him to enter and exit trades at optimal times.
Interestingly, Darvas did not look at the stock market intraday. Instead, he made trading decisions largely while sleeping. He used Barron's for research while touring internationally, and executed trades through telegrams and cables to his New York broker. His strategy culminated in a fortune by age 39 and media recognition, including a feature in Time magazine.
Today, the Darvas Box Theory is still used by traders, including those trading the $QQQ ETF. The chart used in this article is courtesy of TrendSpider.com, demonstrating the continued relevance of this pioneering approach to stock trading.
In conclusion, Nicolas Darvas' story serves as a testament to the power of innovation and perseverance in the world of finance. His development of the Darvas Box Theory revolutionised the way traders approached stock trading, and continues to be a valuable tool for traders today.
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