Nicolas Darvas was a star performer in a dance troupe. In his spare time, he also made over $2,000,000 on the stock market.
This was over 50 years ago during the fifties. I don’t know the equivalent in today’s money, but in technical terms it is a truck load of dinero.
So, how did he do it? How did a dancer – travelling the world, often in remote areas, with no access to the luxury of the internet and information we have today – do what everyone else struggles to do in this day and age?
Darvas understood that Wall Street was full of noise. He found that whenever he was closer to the street, or to the action, he was influenced by all of the noise and made sub-optimal decisions.
Travelling around the world was an advantage to Darvas because he did not hear all of the whispers and rumours, winks and nudges, that people close to the exchange typically hear. He was able to shut all of this out and focus on his method. It is something we can learn from today; how many times have you bought a stock because “news was coming”? I know I have back in the day. Now, I prefer to trade the reaction, rather than the expectation. When you play the cards that are in front of you, and not the cards that you are guessing, you get much purer setups.
What Darvas had discovered is that insider trading could be traded on legally. He realised that stocks that were rising on large volume tended to be insiders buying the stock before the public became aware of the information.
Of course, the regulation is a lot stricter on that now – but we would be silly if we didn’t believe that insider buying and selling went on. Very often, large volumes often precede a bid that is announced – and the volume was the tell. It is not often that I am made inside on a stock and the price does not immediately begin to fall as those same insiders start selling or begin to tell their friends who also sell.
Once Darvas had found a way of identifying stocks before they made big moves, he needed a system to capture that information and turn it into a tradeable method. Enter the box system.
The Box Method
Darvas realised that stocks would move up and down in moves, and would draw boxes on charts (support and resistance was the idea). He would buy when the stock broke into a new “box”, and place the stop just underneath the top of the box below.
Darvas understood the concept of cutting losses quickly. This is something that most traders never quite get their head around. Often, they run losers until they are 70-80pc down – where their capital is now worthless. Due to the numbers, they would need a ten bagger just to breakeven and make any realistic money!
By cutting losses and setting stop losses via telegrams to his brokers in New York, Darvas was able to be strict on risk management, and without the noise he was able to focus on this. Darvas’s day job was dancing and so he was not emotionally dependent on the stock market to pay his bills either.
Does it work today?
The Box method still works today. Support and resistance zones still exist, and spotting large volumes is still a good indicator of potential moves. Darvas’s book How I made $2,000,000 in the Stock Market is as relevant today as it was back then – it is an essential read for any aspiring trader.
Nicolas Darvas proved that you don’t need to be amazing genius or a finance whizzkid in order to make money in stocks. If you are able to follow rules, and you know the rules that must be followed – you can make money. That was his belief, and a belief I share with him too – as I wrote about in a previous article.
Author Michael Taylor’s website www.shiftingshares.com contains numerous tutorials on how to trade and invest as well as his free book – ‘How to Make Six Figures in Stocks’.