How to Trade Shares – Darvas Box Trading Method – and Darvas Box Calculation using Excel
Second Industrial Revolution
Nikola Tesla was a top scientist who originated from Croatia. Tesla invented the modern alternating current electric power systems and the distribution of electricity using poly-phase. Tesla was a scientist who truly helped usher the second industrial revolution. Tesla was considered by many as a mad scientist and as such died impoverished at 86 years old.
$2 Millions in 18 Months - in the Stock Market
Exit Tesla; enter Nicolas Darvas, a 25 year old ballroom dancer who originated from BudapestHungary. Darvas, who danced with his half sister, Julia, was the highest paid ballroom dancing pair in the United States starting 1951. Darvas was a self-taught stocks trader who made $2 Million in 18 months in the stock market. He made his trades while on dancing trips thousands of miles away from United States. He communicated to his stockbroker using the old hot technology of cables and telegraphs. Despite Darvas having had such a success in the stock market, the New York Attorney General believed that Darvas’ story false.
Darvas Box Method
Darvas had designed a trading strategy which he called Darvas boxes where he would only buy stocks that were trading at new yearly highs. With his Darvas box method, Darvas was able to turn his original investment of $10,000 into $2 million in 18 months. Unlike other claims by stock traders that you may find elsewhere, the Darvas story is the real truth of what he did. But Darvas method is only for trading a rising market and his success was only based on a very bullish market.
Buy the Book on How Darvas Made $2 Millions in 18 Months - in the Stock Market
Plotting Darvas Boxes Is Complex
The Darvas box trading method uses a series of states or conditions to determine the tops and bottoms of Darvas boxes by using the high and low of your chosen period. To plot the Darvas boxes, you will use the conditions listed below. It may look complex.
Choose a period you want to trade, say, daily.
1. Condition-1 will start with any bar; the high for the day is the top of the box.
2. A bar will move to condition 2 when the day’s high is lower than the condition-1 period. If not, the bar remains in condition-1 and forms a new top of the box.
3. A bar will move to condition 3 when the day’s high is lower than the condition-2 period. If not, the bar returns to condition-1 and forms a new top of the box. In condition-3 the bottom of the box is formed.
4. A bar will move to condition 4 when the day’s low is higher than the condition-3 period. If not, the bar returns to condition-3 and form a new bottom of the box. If the day’s high is higher than the top of the box, start all over in condition-1 with that high as the top of the box.
5. A bar will move to condition-5 when the day’s low is higher than the condition-4 period. If not, the bar returns to condition-3 and forms a new bottom of the box. If the day’s high is higher than the top of the box, start all over in condition-1 with that high as the top of the box.
Only after condition-5 is reached is Darvas box formed.
Nicolas Darvas Was a Lucky Man
Nicolas Darvas was a very lucky man because his mind was ignorantly set that he could only trade in the upside direction and coincidentally the market was doing a very strong bull market, repeat, strong bull market.
Another guy by the name W.D. Gann, who had his original manuscript lost, was a guy who believed that speculating in stocks should be handled like any other business and that gain of 15% of your original money invested per year is good business.
W.D. Gann’s Theory
W.D. Gann had his theory that:
1. Trend has to be your friend in any successful stock trading
2. An uptrend is a series of successive higher highs and higher lows
3. A downtrend is a series of successive lower highs and lower lows
Gann’s Lost And Found Manuscripts
From Gann’s lost manuscript, Gann had one mechanical method which he used for trading commodities. In that method, he defined the following:
1. An upswing happens if the market makes two consecutive highs
2. A downswing happens if the market makes two consecutive lows
3. That a peak is formed by an upswing which is followed by a downswing. If the price was to penetrate past the top of this peak, then the trend changes from down to up.
4. That a valley is formed by a downswing which is followed by an upswing. If the price was to penetrate below the bottom of this valley, then the trend changes from up to down.
Valleys, Peaks and Boxes
When you look at these two guys, Darvas and Gann, they are talking of more less the same thing only that one is using valleys and peaks whilst the other one is using boxes with tops and bottoms. But there is one thing they are not telling you, and they are very silent about it.
Ralph Nelson Elliott
Another guy called Ralph Nelson Elliott, an accountant, also came up with his method called Elliott Wave Theory. Elliot, instead of peaks, valleys and boxes, he used waves. Elliott was a man who could see far. He could see that not all waves (read valleys, peaks, boxes) are of the same form and that form depends on price and time. He therefore concluded that telling which waves are of the same form and degree is an intellectual challenge.
Graph of Your Future Is Not Drawn
The future of stock market prices is not predetermined. Your future is not predetermined. Your future graph is not yet drawn until you reach there. The stock market can do anything anytime without reference to anybody.
The Small man
These theories by Darvas, Gann and Elliott can be complicated for the small man. Did you hear those two words, intellectual challenge? It would only be fair if each one of us was entitled to a piece of the cake in the stock market. Yes, why not?
The aim of this article is to try to see how one can trade the stock market using the Darvas Box Trading Method or a variation of it. Considering the availability of MS Excel and the fact that many people are conversant with MS Excel, we are to use a simple formula with only four steps which I believe will explain the concept of Darvas boxes. The answer or the results will not be in form of boxes since we are using simple MS Excel software. You will not spend even a single penny to setup the method. The data to use will be real time (perhaps only 15 minutes delayed) from Yahoo finance. It’s Free of charge to download. The following are the steps to follow:
Steps for Darvas Box Calculation using Excel
1. Go to Yahoo Finance and download, as spreadsheet, weekly data for QQQ PowerShares for the last 80 weeks, you can also do it with your whatever stock.
2. Open an Excel spread sheet and paste the weekly highs data in column A, starting from A1,A2,…..up to A80.
3. Input the weekly lows data in column B, starting from B1,B2,…..up to B200.
4. Insert in column C the formula “=IF(A1<A2,A1,A1+2)”
5. Insert in column C the formula “=IF(B1<B2,B1-2,B1)”
6. Select the values in columns A, B, C, and D, and plot a chart using those values.
Repeat All the Steps
In the next worksheet of your MS Excel, we are to repeat all the above steps but this time using the monthly data for QQQ PowerShares as follows:
1. Go back to Yahoo Finance and download, as spreadsheet, monthly data for QQQ Power Shares for the last two hundred 45 months.
2. Open an Excel spread sheet and paste the monthly highs data in column A, starting from A1,A2,…..up to A45.
2. Input the monthly lows data in column B, starting from B1,B2,…..up to B45.
3. Insert in column C the formula “=IF(A1<A2,A1,A1+2)”
4. Insert in column C the formula “=IF(B1<B2,B1-2,B1)”
5. Select the values in columns A, B, C, and D, and plot a chart using those values.
Two Simple Charts
We now have two simple charts. Each of these charts has 4 lines. The middle two lines are the price line – one is for the high prices, and the other line is for the low prices. The upper line and the lower lines represent the tops and bottom of the boxes, or peaks and valleys, or waves. Where the two lines separates from the price lines marks the area of a significant top or bottom that is the high or low of the peak or the valley. The separation of the two lines from the price lines marks waves that have a high probability of being of the same form and degree for the period selected - in this case we have a one week period and a one month period.
Rules of Trading
1. Trading in uptrend direction: trade if the price has penetrated above the highest high of the peak area. This is regardless of how the lowest low is doing. But trade only if the longer term period is in an uptrend; otherwise get out of the market completely.
2. Trading in downtrend direction: trade if the price has penetrated below the lowest low of the valley area. This is regardless of how the highest high is doing. But trade only if the longer term period is in a downtrend; otherwise get out of the market completely.
Explaining the Two Charts
There are only two rules to follow. Now, let’s look at the two charts and see what happened.
1. Monthly chart, point L1, In November 2007 there was a low of 48.65 which was broken in January 2008 meaning the longer period was in a downtrend and all the trades done with the shorter period should have been done in the downside direction.
2. Monthly chart, point H1: From the longer period chart, which is the monthly chart, we see that on February 2009 we had a peak with a high of 31.68 which was broken in April 2009 which means the longer period became an uptrend up to today march 2010. This means all the trades you make using the shorter period, with the weekly chart, has to trade in the upside direction.
3. If you look at the weekly chart, you will see that you should have been able to enter the market and trade in upside direction at H1, H2, H3, and H4. These are all wining trades.
4. If you look at the weekly chart, you will see that you should have been stopped out of the market at point L1, L2 and L3. These are a nuisance but you have to learn to leave with them.
Make Money in the Stock Market
If you practice with these kinds of ideas, you should be able to make money in the stock market. If you can’t, then that is too bad for you, but don’t worry. To succeed in shares trading, read books on stock trading. You can get yourself a good book at the trusted Amazon store. Below this article you will find a listing of a few books which you can buy from the Amazon store.
Why Pick On QQQ?
Why we picked on QQQ and not IBM is because QQQ is an exchange traded fund (ETF), it’s like a stock in the sense that it pays dividends. It’s an average of the NASDAQ 100 largest companies and has little ‘noise’ compared to individual stocks.