Nicolas Darvas's Stock Trading Inspirations and Quotes
Article: The Legendary Trend Trading System of Nicolas Darvas
In the 1950s, a professional dancer by the name of Nicolas Darvas made a name for himself not just on the dance floor, but also in the stock market. Darvas, who hailed from Hungary, adopted a unique approach to trading stocks, one that would later become known as the Darvas Box theory.
At the heart of this system is a rule-based technical approach, where stock prices are viewed as moving within "boxes" or price ranges. Darvas would buy stocks when the price broke out above the top of a box, and set a stop-loss just below the breakout level to limit losses. As the trend continued, he would trail the stop-loss upward, enabling him to "jog along" with rising stocks and systematically lock in profits by selling when the price fell below the box, signaling a trend reversal.
The system’s core elements include defining boxes, a buy signal when a stock price breaks above the upper boundary of a box on strong volume, a sell/Stop-loss signal when the stock price falls below the lower boundary of the box or the trailing stop-loss level, emotional discipline, emphasis on volume, and finding "new leaders."
Darvas emphasized a cold, unemotional approach—holding only rising stocks and selling those that fall, avoiding hope, fear, or greed from clouding decisions. He also placed great importance on volume, ensuring that breakouts were supported by strong volume to be valid. In addition, he looked for stocks showing early signs of upward momentum even when broader markets lagged, relying on his method to spot emerging trends.
Darvas' trend trading system was put to the test during the 1957–1959 bull market when the S&P 500 surged over 53%. Over about 18 months, he claimed to have turned $25,000 into over $2 million, a feat chronicled in his 1960 book How I Made $2,000,000 in the Stock Market. Despite traveling as a professional dancer and relying on delayed financial reports, he successfully executed trades based on this strictly mechanical system.
Some notable aspects of his success included his method often detecting insider buying before public announcements, giving him an informational edge. He also identified and invested in emerging leaders such as Universal Products, Texas Instruments, and Fairchild Camera. His use of a trailing stop-loss was crucial to locking in profits and avoiding emotional decisions.
However, it's important to note that the system performs best in bullish, trending markets. It can be vulnerable to false breakouts and over-optimization in sideways or bearish markets, which can trigger premature stops or whipsaws.
In the end, Darvas' trend-following box system is a disciplined, mechanical approach to trading breakouts within defined price ranges, with clear rules for entries and exits. Its demonstrated success during the significant 1950s bull market established it as a foundational trend trading method and it remains a classic for those seeking systematic momentum strategies.
One of Darvas' quotes that encapsulates his approach to trading is, "My only sound reason for buying a stock is that it is rising in price. If that is happening, no other reason is required." Another quote that highlights his emphasis on discipline is, "I was successful in taking larger profits than losses in proportion to the amounts invested."
Despite his success, Darvas was not without his cautions. He admitted to becoming over-confident as a dangerous state of mind in the stock market and kept out of bear markets and left exceptional stocks to those who don’t mind risking their money against the market trend.
Inflation-adjusted to 2020 buying power, $2,250,000 would be equivalent to $20,235,830. This system turned $36,000 into $2.25 million between 1956 and 1958. Darvas made a decision to buy high and sell higher, and he let his stop-loss decide when to exit an uptrending stock. He also believed in analysis rather than forecasting and stated that company reports and balance sheets only provide information about the past and present, not the future.
In conclusion, the Darvas Box theory is a testament to the power of a disciplined, mechanical approach to trading. Its success during the 1950s bull market has made it a classic in the world of trend trading and a must-know for any aspiring stock market investor.
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