Darvas Box Trading Lesson 2
For many years I have tried to teach novice traders about planning and managing their trades in a disciplined fashion. I consider discipline and timing to be the essence of successful trading; enter and exit at the right time and always have a plan. My plan always includes an entry and exit strategy and a cardinal rule to never, ever, trade without a stop-loss. My own personal trading mantra is simple
“Only own rising stocks.” Over the years I’ve seen people buy stocks that are clearly in a downward price trend. The reason given for this strategy is usually that they are trying to buy when the stock is cheap to maximize the return when the stock price starts to rise. This is one sure way to lose your trading capital. This method just does not work.
A problem with novice traders has always been maintaining the discipline needed to trade successfully. How could I ensure that my students would trade with a comprehensive plan? To help with this problem, the software package I designed incorporates a “Combo” scan that will find me rising stocks that exhibit certain volume, and price characteristics. My scan solved the entry problem, making it easy to find the right stocks. However, the exit timing and stop-loss setting still proved problematic. A Pro Trader member brought Nicolas
Darvas’ technique to my attention and I quickly realized that this was a solution to the problem. To my amazement, Darvas’ entry criteria for his boxes fitted my “Combo” scan so closely that our software developers used it as the entry criteria for a “Darvas Box” scan that I quickly commissioned.
Will Trading Darvas Style Work for You?
My Darvas software was designed to drastically reduce any costly learning experiences. Most people lose thousands of dollars in their early attempts to find financial freedom through the stock market. What is potentially worse than losing thousands of dollars is the wasted time. Darvas served a five-year apprenticeship with no teacher. Traders today have the benefit of computers and software and can be trading successfully in a matter of days.
You need an understanding of why you need a plan. A major obstacle to successful trading is the trader’s emotions. Listening to hot tips, blindly following brokers, tipster’s letters and allowing greed to affect a trading decision is the downfall of most new entrants to the market.
Apart from the obvious profits, a trading plan will remove emotion. A good plan:
- Will bring discipline to your trading.
- Will help you manage risk. Having a system makes you define the risk on each trade. If you don’t define the risk then how can you control it?
- Will bring you consistency.
- Should limit your losses and let your profits run.
- Should allow you to participate in major moves and trends.
Nicolas Darvas’ trading technique fulfils these criteria.