Trading in the 1950’s

Imagine what it was like to trade the markets back in the 1950’s. You have no access to computerized charts. Your access to any chart at all is scarce or inconsistent (unless you create your own…by hand). Market price information is limited to the ticker tape (if you can find one), telegrams, daily newspapers, or picking up the phone and calling your broker. There were also no financial television or radio networks providing breaking market news. And as far as trade execution is concerned, you must call in your trades by phone.

The Upside of Being Limited: Concentration and Focus

These are the conditions that Nicolas Darvas—a well-known dancer turned famed investor—had to work with when he reportedly turned a $36,000 stake into a $2.25 million profit in three years. Unlike most individual investors today, market participants in the 1950’s had very little data to work with. Trading conditions were much more limited, with retail investors unable to access the same data as most professional traders and investors. Yet this “limitation” may have been advantageous. This was certainly the case for Darvas who, despite limitations, concentrated on the data that he was able to access.

Darvas’ Conditions for Identifying Potential Stock Trades

Darvas focused on stocks in growth industries, as they offer the potential to outperform others in the intermediate to longer term. This also served as a wise and practical solution, considering that market data was then sparingly accessible, and that he was limited to monitoring only a handful of stocks daily; stocks that held a greater propensity for momentous or volatile movement.

As a momentum investor, Darvas placed significant emphasis on trading volume—a significant indicator to help confirm the strength of a stock move. Once he identified what he considered tradable stocks, he then waited for a high-volume breakout to signal a buying opportunity. And this is where his “box” comes into play.

The Darvas Box Explained

The Darvas Box looks like a square or rectangle isolating a range of price bars:

• The box itself indicates a period of non-trending or consolidating movement; preferably, with low volume and volatility.
• The upper part of the box indicates a ceiling of resistance.
• The lower part of the box indicates a floor of support.

These elements constitute the basic setup.

The trigger for a trade signal (in Darvas’ case, always a “buy” as he was a long-only investor) is a breakout with high volume.

Darvas placed his initial stop at the bottom of the box, trailing his stop-loss orders upward when new boxes were formed. He also had his own set of rules for increasing positions as they continued to break out of subsequent boxes.

It is important to note that Darvas’ preferred looking at weekly charts to construct his boxes. Although Darvas Boxes can be used in any chart timeframe, from Weekly to 1-Minute charts, note that the market dynamics and context will differ depending on the timeframe you use.

Pros and Cons

The main advantage that the Darvas Box offers is a clear-cut, rules-based perspective on non-trending movements and their support and resistance areas. If you are looking for momentum breakouts, the boxes can serve as a base structure from which breakouts might happen.

The main disadvantages are three-fold. First, markets can whipsaw, which not only causes false signals, but also multiple and asymmetrical “boxes” within a given period. Second, the lower the timeframe, the more frequent the whipsaws—its volatility greater than those of higher timeframes. Third, the support and resistance that a Darvas Box indicates is based solely on its own logic. In other words, there will be other areas of support and resistance based on other rules and approaches.

Conclusion

To ask whether this tool works or doesn’t work is to ask the wrong question. A tool can’t be expected to work for every situation. The important thing is to determine if a tool is compatible with your overall strategy or approach. Does it enhance your market perspective and planning? If it does, then use it; if not, move on to finding another tool.

Darvas’ box theory worked for him. He designed his theory by synthesizing knowledge derived from various other sources that he carefully studied. If asked, Darvas would probably encourage you to do the same he did—customizing an approach from many sources, one that matches your needs.

Author: Halifax America’s Content Designer/Strategist Karl Montevirgen

IMPORTANT NOTE:
Exchange transactions are associated with significant risks. Those who trade on the financial and commodity markets must familiarize themselves with these risks. Possible analyses, techniques and methods presented here are not an invitation to trade on the financial and commodity markets. They serve only for illustration, further education, and information purposes, and do not constitute investment advice or personal recommendations in any way. They are intended only to facilitate the customer’s investment decision, and do not replace the advice of an investor or specific investment advice. The customer trades completely at his or her own risk.