Even though he trained as an economist at the University of Budapest, he found himself drawn to the world of entertainment, eventually becoming a successful dancer. However, his path to success was not without challenges.
He fled the country with a forged exit visa and fifty pounds sterling. He made his way to Istanbul, Turkey, where he eventually met up with his half-sister Julia. The two of them became a dancing team, travelling throughout Europe and eventually making their way to the United States.
They continued to tour and perform, earning a reputation as a talented and dynamic duo and by 1956, they were at the height of their fame, with audiences flocking to see their shows.
During his off hours as a dancer, he devoted himself to studying the stock market, reading over 200 books on the subject.
However, the two books that he returned to again and again were The Battle for Investment Survival, by Gerald M. Loeb, published in 1935, and Tape Reading and Market Tactics, by Humphrey Bancroft Neill, published in 1931. These books proved to be invaluable resources, providing him with the knowledge and tools he needed to become a successful investor.
Later he made a significant profit from a couple of stocks that he had invested in. After this successful trade, he came up with a trading strategy for trading stocks. Using this approach, he was able to earn more than 2 Million dollars in just 18 months during the bull market of 1957-1958. This was seven years after his first trade.
His main source of stock selection was the weekly magazine Barron’s. While this may seem like an unusual choice, there were several reasons why he found it to be a valuable resource. For one thing, he was often travelling with his performing dance troupe, so he needed a way to keep up with the latest developments in the stock market. By reading Barron’s, he was able to stay informed about the latest trends and news, even while on the road.
Another advantage of using Barron’s was that it was usually a week old by the time he received it. This may seem like a disadvantage, but in fact, it allowed him to see which stocks had made good advances on strong volume over the past week. This gave him an idea of which stocks were likely to continue their upward trend and which ones were starting to plateau or decline.
Once he had identified a stock that he was interested in, he would use cables and telegrams to send his buy and sell stop orders to his broker in New York City.
He claimed that his method allowed him to identify the signs of insider trading before a company’s release of favourable news to the public. Of course, there is no way to verify whether his claims about insider trading were true. It is possible that he was simply making a bold and exaggerated claim in order to promote his method.
The name of this professional dancer turned professional trader was Nicolas Darvas, and the effective approach to trading stocks he developed was called the “BOX theory”. It was based on the idea that a stock price wave could be represented as a series of boxes. You draw these boxes by connecting the swing high and swing low like this. According to Darvas, when the price of a stock was confined within a box, he would wait and not make any trades. However, when the price rose out of the box, he would buy the stock and simultaneously set a stop-loss just under the ceiling of the box.
He also used high volume to find the best setups, but the real key to his great success was the stop-loss. If you look closely, you will notice that if the entry is at the top breakout of the box, and the stop-loss is just below the ceiling of the box, the stop-loss distance is so small that even a decent size upward move would result in a huge reward to risk ratio. In other words, when he booked profits, he booked some really big profits, and when he booked losses, he booked really small losses.
At the age of 39, after his success as a stock trader had been widely recognized, Darvas documented his actions in the book, “How I Made $2,000,000 in the Stock Market.”
But the Critics of Darvas’ trading technique believe that his initial success was due to the strong bullish market at the time and that this technique would not be effective in a bear market. However, Darvas himself believed that he was not suited to short selling and suggested that experienced investors should consider it.
But Critics have an interesting point. When Darvas made 2 million dollars in profit, the stock market looked like this.
This bull market was an exciting time for the stock market. It was a period of rapid growth and optimism and provided many investors with the opportunity to earn significant returns on their investments. While there were always risks and uncertainties, the overall mood of the market was one of confidence and positivity. This period is now looked back on as a time of great opportunity and success for many investors and traders.
If you had randomly taken long trades in this market, you would have probably made a profit.
To find out if Darvas Box Strategy was actually good or just luck, we need to test it 100 Times.
Since Darvas used a tight stop-loss and a high reward-risk ratio, in the first test, I used a 5 to 1 Reward Risk Ratio. I also used the S&P 500 1-Day timeframe to test his strategy in around the same bull market that he traded. I used the 200 moving average to find the uptrend, and only took long trades as he did. The results were shocking. The Darvas Box Strategy got an approximate win rate of 45%, even with a high reward-risk ratio of 5 to 1.
The strategy almost tripled the initial account size without even compounding. With compounding, the profit would have been even higher. Then I tested the strategy again with a 1.5 to 1 Reward Risk ratio, and the win rate was approximately 73%. That’s the highest win rate out of all the strategies we have tested. But there was just one problem. You see, at least on TradingView, only the closing prices of the day data is available if we go back to the time period Darvas traded. There is no high-low of the day data available.
So in the first test, I used the closing prices to make buying and selling decisions, and it worked excellently. However, in the second test, I also used high-low prices, and the Darvas Strategy suddenly became the worst strategy we have ever tested 100 times, getting a win rate of just 27% approximately. From the best to the worst in pretty much the same market structure. Adding volume confirmation near the entry is not going to make this low of a win rate better either. For comparison, I tested the Beep Boop Indicator we created in the previous video, and it got a 50% approximate win rate in the same structure even with the high-low data. That’s way higher and better!
The reason why Darvas Box Strategy changed the win rate so drastically has to do with the market noise. If you make decisions only by looking at the closing prices, the price movement looks a lot cleaner. But if you add the high-low prices data, there is more noise in the price movement. This noise is what triggered the stop-losses in the second test. So the critics of the Darvas Box Strategy were not completely wrong. The strategy only works if the price is in an extremely good bull run with less market noise, and luck played an important role when Darvas turned 10,000 dollars into more than 2 million dollars. The Darvas Box Strategy works like magic with special conditions, and doesn’t work in normal market conditions.
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