Self-taught trader Nicolas Darvas developed his own stock trading system that he used to successfully trade the stock market. As he traveled halfway around the world dancing professionally as a ballroom dancer, Darvas was 1,000’s of miles away from Wall Street… and yet, his trading system made him millions trading the stock market in the 1950’s.
Although he initially knew nothing about trading the stock market, he was soon beating the so-called Wall Street professionals at their own game.
At the time Darvas was developing his trading system, he didn’t have the luxury of technology like traders now have today with computers, Internet access, online brokers and being able to do all kinds of research and analysis at the stroke of your fingertips.
All Darvas essentially had as his so-called trading platform was “cablegrams” as a means of communicating back and forth with his stockbroker while he (Darvas) was on the other side of the world dancing professionally.
The cablegrams were used as a device to relay information to his stockbroker for such things as getting stock quotes and giving instructions as to what type of stock trading orders to use when either buying or selling stocks. Some of the types of stock trading orders that Darvas used included “buy-on-stop” (for buying) and “stop-loss” to manage trading risk.
Darvas’s “Box Theory”
Nicolas Darvas developed his own unique trading system built around his “box theory.” His theory was based on a set of principals from observing how stocks prices behaved when they were in a prevailing trend.
The principals of the “box theory” according to Darvas –
Prevailing Trend:
Darvas would keep a log of stock prices from his cablegrams and plot them out to see if a prevailing trend might possibly be forming. The prevailing trend could either be in the form of an uptrend or a downtrend.
Consolidation Range:
Darvas noticed that within a prevailing trend, stock prices had a tendency to pause and cool off, and then move in a consolidation range (sideways moving fashion) where prices would fluctuate back and forth within such consolidation range. In essence, this was the formation of the “box” area according to Darvas’s box theory.
Dimensions of the Box:
To help him identify the appropriate dimensions of the box area (consolidation range), Darvas would generally begin with the high and low trading points when a new consolidation range would start to form. If subsequent prices did not touch prior high or low trading points within the consolidation range for 3 days in a row than such prior high and low trading points would set the top and bottom borders of the box area respectively. Darvas would then watch how prices reacted at both the top and bottom borders of the box area to make his trading decisions.
Personality of Stocks:
Darvas also knew that each stock had its own unique trading personality and its own level of price volatility. As such, he would make adjustments to the dimensions of the box area to better fit that stock’s price behavior since his box theory was an art and not a science.
How Darvas used the “Box Theory” for Trading:
The “box theory” that Darvas developed gave him signals as to:
- Opening a trade
- Closing a trade for a profit
- Closing a trade for a small loss
If prices broke above the top border of the box area, this would signal to Darvas a potential buying opportunity as the prevailing trend might be going higher.
If prices broke below the bottom border of the box area, this would signal to Darvas to get out of his stock positions altogether as prices might be going lower.
Later in his trading life, Darvas revised his “box theory” that was purely based on technical analysis to include a very powerful element of fundamental analysis – Earnings! (a slight change that made an even bigger impact to his already successful trading system). He named his new system the “techno-fundamentalist” theory.
Wall Street Here I Come – Disaster Adverted
Trying to parlay his already successful trading system, Darvas thought that by being “closer” to the action of Wall Street it would make him even more successful and richer as a trader. So, he decided to trade out of his broker’s office in New York.
Quickly it all became a disaster for Darvas.
His broker’s office was a completely different type of trading environment than what Darvas was use to when he was 1,000’s of miles away from Wall Street. His broker’s office was a fast pace “hustle and bustle” environment with a lot of “noise” and trading hype being tossed around.
Darvas got caught up in the whirlwind of trading opinions and gossip from all those around him causing him to quickly get distracted with conflicting thoughts. He was now operating with all sorts of confusion and uncertainties that greatly effected his confidence and ability to think clearly as well as abandoning his winning trading system altogether.
Darvas was now letting his raw emotions take over that controlled his trading decisions rather than sticking to his “box theory” system and carefully planing out his trades. As a result, he was now taking a severe beating both financially and emotionally.
“The truth was that as my pocket had strengthened, my head had weakened. I became over-confident, and this is the most dangerous state of mind anyone can develop in the stock market”
– Nicolas Darvas
What Darvas was desperately missing was his need to be detached from any Wall Street influence that gave him the ability to think clearly and make well thought out trading decisions – as he once had being halfway around the world.
Two Million Dollars Coming
After taken a severe beating from being too “close” to Wall Street, Darvas soon leaves his stockbroker’s office that was supposed to serve as a personal trading mill churning out even bigger trading profits than his already successful trading system had given him.
As he recovered from this disastrous trading stint, Darvas knew deep down inside that he had to reclaim his old style of trading that he knew best – the “box theory.” When he did, he was able to think clearly again and his trading confidence came back stronger than ever.
Now he was in position once again to succeed in trading stocks and to make even bigger money – this time making $2,000,000 in the stock market – the Darvas way!
Valuable Lessons He Learned
Unknowingly to him at the time, being detached from Wall Street was the greatest thing for Darvas to succeed in trading the stock market. It gave him a clear way to think and give him the confidence to plan out his trading strategies. This is just what Darvas needed for him to perform at his trading best.
“Being thousands of miles away from Wall Street, I succeeded in disassociating myself emotionally from every stock I held”
“I was working while Wall Street slept”
– Nicolas Darvas
His Most Difficult Problems
According to Darvas, his most difficult problem was with self-discipline “not to sell a rising stock too quickly.”
He also had to work on keeping his emotions under control like any serious trader must do in order to avoid making reckless or costly mistakes that can bring a trader to financial and personal ruin.
“I had to bring my emotions – fear, hope and greed – under complete control”
– Nicolas Darvas
To help him with being more diligent about self-discipline and keeping emotions under control, Darvas kept a trading journal where he would write down the reasons why to buy a stock (or sell a stock) as well as making notes as to why a trade may not have worked out as originally planned.
