Charting University » Darvas Box Theory
Nicolas Darvas, along with his half-sister Julia, began their popularity in the United States as a famous dance team. In fact, together, they were the highest paid dance team in the country in the early 1950's. They performed around the world with such great entertainers as Bob Hope and Julia Garland.
Hungarian by birth, Nicolas Darvas trained as an economist at the University of Budapest. Reluctant to remain in Hungary until either the Nazis or the Russians took over in World War II, he fled at the age of 23 with a forged exit visa to Istanbul, Turkey. It was shortly after this that he and Julia began their careers together.
As popular as he was back then for his dancing talents, the reason that we are interested in Mr. Darvas today is because of his trading system, "The Box Theory". Darvas came up with this approach for trading stocks that netted him a $2,450,000.00 ($2.45 million) fortune in just 18 months during the 1957-58 bull market. He had only been trading for 7 years!
In his words, this is how Darvas found interest in Wall Street...
"It was November 1952. I was playing in Manhattan's "Latin Quarter" in New York when my agent telephoned. He had received an offer for me and my dancing partner, Julia, to appear in a Toronto nightclub. This was owned by twin brothers, Al and Harry Smith, who made me a very unusual proposition. They offered to pay me in stock instead of money. I have had some strange experiences in show business, but this was a new one.
I made further inquiries and found they were prepared to give me 6,000 shares in a company called Brilund. This was a Canadian mining firm in which they were interested. The stock at that time was quoted at $0.50 cents per share.
I knew stocks went up and down - and that was about all I did know. So I asked the Smith brothers if they would give me the following guarantee: If the stock went below $0.50 cents, they would make up the difference. They agreed to do this for a period of six months.
It so happened that I could not keep that Toronto date. I felt badly about letting the brothers down, so I offered to buy the stock as a gesture. I sent them a check for $3,000 and received 6,000 shares of Brilund stock.
I thought no more about it until one day, two months later, I idly glanced at the stock's price in the paper. I shot upright in my chair. My $0.50 cent Brilund stock was quoted at $1.90. I sold it at once.
At first I could not believe it. It was like magic to me. I felt like the man who went to the races for the first time and with beginner's luck backed every winner. Cashing his winnings he simply inquired: "How long has this been going on?" I decided I had been missing a good thing all my life. I made up my mind to go into the stock market!"
What is the Darvas "Box Theory"?
Many times we see the indexes move sideways. We refer to this as a Trading Range or Sideways Channel. Essentially this creates a 'box or boxes' across the chart. Darvas searched for these, especially in stocks that were at or near 52-week highs. When price moved above the upper boundary of the box - he would buy. Protection in the trade was then placed with a stop-loss order under breaking boundary of the box.
Traders know this clearly as support and resistance today - a risk vs. reward system. We have incredible technology today for building personal charting platforms in our own home or office. Darvas' main source of stock selection was from Barron's Magazine. The magazine was usually an edition a week old because of his world travels in dance at the time. His buy, sell, and stop-loss orders to his broker in New York came via telegrams and cable messages. A big difference from our fraction-of-a-second order entries made today!
To construct a Darvas Box you must first look for a high. This can be seen in the first blue box on the chart below near 11,900. This high price should hold for a period of not less than 3 days, considering that we are using the daily chart timing. Then, and only then, can a lower boundary for the Box be sought. Following the same guideline, the low should also not be breached for 3 consecutive days. There are some minor exceptions caused by extremely low volume breaches in either direction.
By simply looking at stock patterns over a larger screen you will see up and down movements. Then draw any boxes you see in the immediate area with your charting software.
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The upper box (long blue) shows where the Dow Jones Industrial Average worked inside a box of 10,800 - 11,900. A drop of 4,000 points followed the breach of the box's lower boundary.
In our second box the index is running inside the 7,800 - 9,400 area. Price is nearing the 9,400 top and this is where a breakout would occur.
A significant advantage to these boxes is that they help to level-out the big market swings. Once you can identify these boundaries, it allows for a solid set-up for the next bigger move. Although I have used a daily chart for this example, most any timing can be used for the Box Theory. This includes Intraday settings and longer term weekly and monthly settings.
One factor that the Darvas Box Theory is unable to tell us is - when price is inside it's boundaries - whether or not the market is going to move up or down. So just because the lower example is moving higher does not necessarily mean the market will move higher. It would take a 9,400+ build, and then for this to hold as support, for a proper long signal to be alerted.
If you can identify these boxes and draw them on your charts, they will greatly remove the guesswork that many traders face on a day to day basis.