What is Darvas Box Theory?

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The Darvas Box Theory is a technical analysis method developed by Hungarian dancer and investor Nicolas Darvas in the 1950s. This theory involves drawing price ranges (boxes) to identify buy and sell points for stocks. Specifically, when a stock price breaks above the upper limit of a previous box, Darvas considered it a buy signal; conversely, when the stock price falls below the lower limit of the current box, it is a sell signal. This method emphasizes trend-following and price momentum, with stop-loss points set to manage risk. The Darvas Box Theory is straightforward and has been used by many investors to capture trading opportunities arising from price breakouts.

Definition

Darvas Box Theory is a technical analysis method created by Hungarian dancer and investor Nicolas Darvas in the 1950s. The theory identifies buy and sell points for stocks by drawing price ranges (boxes). Specifically, when a stock price breaks above the upper limit of the previous box, Darvas considers it a buy signal; conversely, when the stock price falls below the lower limit of the current box, it is a sell signal. This method emphasizes following trends and price momentum, managing risk by setting stop-loss points. The Darvas Box Theory is simple and easy to understand, used by many investors to capture trading opportunities from price breakouts.

Origin

The Darvas Box Theory originated in the 1950s, developed by Nicolas Darvas during his tours as a dancer. Darvas traded stocks via mail orders and telegrams, eventually amassing a significant fortune in a short time. His successful experience and trading method are detailed in his book "How I Made $2,000,000 in the Stock Market," which became a bestseller and popularized the Darvas Box Theory.

Categories and Features

The Darvas Box Theory mainly consists of two types: ascending trend boxes and descending trend boxes. Ascending trend boxes are used to identify buying opportunities from price breakouts, while descending trend boxes are used to identify sell signals from price declines. Its features include: 1. Simplicity and ease of use, suitable for beginners; 2. Emphasis on trend following, suitable for momentum traders; 3. Risk control through setting stop-loss points, suitable for risk management.

Case Studies

A typical case is Darvas's own investment in Lorillard Company stocks in the 1950s. He identified a price breakout using the Darvas Box Theory and bought during the price uptrend, eventually achieving substantial profits. Another case is in the early 2000s, where many investors used the Darvas Box Theory to capture short-term price breakout opportunities during the tech bubble. Despite overall market volatility, many investors achieved profits through strict stop-loss strategies.

Common Issues

Common issues investors face when applying the Darvas Box Theory include: 1. How to accurately draw the boxes? It is recommended to use historical price data and technical analysis tools to assist in drawing; 2. How to set stop-loss points? It is usually advised to set stop-loss points below the lower limit of the box to stop losses promptly when prices reverse. A common misconception is that the theory applies to all market environments, whereas it performs better in markets with clear trends.

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