Darvas Box indicator is a great technical analysis tool which was introduced by Nicholas Darvas in the 1950s. He was a dancer who made $2,000,000 within a period of 18 months, trading in the market while on a global dance tour using this theory. He has actually this amount of money from just $36000. This indicator is also known as a timeless classic.
Some Common FAQ
This concept was introduced by Nicholas Darvas who was originally a dancer. He used a special trading technique from which he made a profit of $2,000,000 withing a span of 18 months. He earned this amount of money trading in the stock market even while on a global dance tour. As per the theory he used to draw boxes around the price to identify a tight range. He then traded the break of these boxes in the same direction of the trend. His trading theory is known as the Darvas Box theory.
This trading technique uses the fundamental idea of trading those stocks that have made new highs. When you see a stock is repeatedly bouncing inside a small range you can draw a box using the high and low of that tight range. The Box is formed when the price of the stock making new highs, falls from high to a point that is not far from previous high. Traders can trade the stock with defined stop-loss formed at the base of the stock.
Sometimes a stock breaks the Darvas Box and continues its upward journey without created a new box. So at the absence of a new box it becomes difficult to trail the stop loss. Now if the stock reverses the trader may lose part or whole of his profit due to absence of new box and a proper stop loss. The trader can then use the ghost boxes to protect the profit. In the trading terminals, we can keep these ghost boxes hidden or visible.
How I Made $2 Million in the Stock Market is the book written by Nicolas Darvas. Darvas was a dancer, crossword compiler as well as a table tennis player. In this book he has documented his experience of his unique trading system. Implementing his system he maneged to make himself a millionaire. Click here to order this book online.
How to set up Darvas Box indicator in your trading terminal?
Zerodha Kite charts has Darvas Box in the studies section. You can attach the indicator on any stock or indices. There is quite a number of parameters in this indicator. The dafault parameters are the following. ATF Lookback Period is 100, Exit Field is Close, Ghost Boxes are optional, Stop Levels are optional. The Levels Offset is 0.01, Price Minimum is 5, Volume Spike is optional, Volume % of Average is 400. Apart from that you can choose the colors of the Darvas, Ghost and the levels.
You can change these default parameters as per your own requirements. Instead of the close you can choose high/low in the Exit Field. You can hide the ghosh boxes. You can also choose to show the Stop Level. That will show the stop loss line on the chart.
How to trade using Darvas Box indicator?
- This tool visually identifies potential breakouts and breakdowns within a tight range. Once a range is established a box can be drawn using the high and low of the range. New boxes will be formed
- The inventor used this indicator only for buying a stock. Create buy position when price moves above the box targeting higher boxes. This buy position will be stopped out if the stock price goes below the base of the box, which is the stop-loss price. The indicator does not give any time limit for price movement. The strategy works well when accompanied by volume.
Long trade setup
Watch the image above to understand how the Avenue SuperMart or DMART stock is making continuous higher boxes and breaking them on the upside to lock in profits. You can trade with a defined target in each trade too. If you are keeping a stop loss at the bottom of the box make sure you keep a target at least equal to or greater than the stop value. Check the equity curve of this trading strategy below.
Short sell setup
We can also use the Darvas Box indicator for short selling a stock. For this setup identify a stock that is breaking down below the box. If the move is associated with good volume the short sell trade can even be more effective. Keep a stop loss at the top of the box and trade with some defined target.
Check in the above image how the Tata Motors stock broken down heavily after breaking the box.
So we found that this trading strategy is a robust and easy to use strategy. The strategy has definite entry rules and stop loss. We also can keep a suitable target according to the breakout size.
The Darvas Box indicator is a very easy to use indicator. Traders can use this technical indicator to create buy position and holds the position till target is reached or the stop loss is breached, irrespective of any time limit. This indicator is a classic example of breaking of support and resistances. Buy signals are when price breaks the box resistances and sell signals are when the price breaks the box supports. Now traders use this indicator even for creating short sell positions.