How one half of a popular ballroom dancing act made $2 million on the stock market is without doubt one of the best stories of the investment world.
It’s got it all … an escape from Europe during the Second World War … a fluke encounter … winners … losers … an against-the-odds comeback … and all rounded off with a foxtrot and a sprinkle of sequins.
And what’s more – the custom indicator behind this story is now simple to add to your charts.
What is not to love about the story of Nicolas Darvas?!
Plus, there’s a huge amount to learn from the mistakes Darvas makes along the way, and the canny magic-box trick he developed.
Strictly stock markets
Darvas fled his native Hungary in 1943 on forged papers, and went on to become a popular dance act alongside his half-sister Julia.
His journey in the world of investment began by chance when, in 1952, he was offered payment in stocks rather than cash for performing in a Toronto nightclub. He found himself the owner of 6,000 shares in Brilund, a Canadian mining firm, worth around 50c a share.
He had no idea about stock markets, but was aware that the value of stocks could go up or down. Two months later, he idly glanced at the stock’s price in the paper …
I shot upright in my chair. My 50-cent BRILUND stock was quoted at ¢1.90. I sold it at once and made a profit of close to $8,000.
And so Darvas was hooked.
The path his journey took from here will be a familiar one to many …
He had some wins – this was a roaring bull market, so just about every stock was going up. Deciding he was a ‘natural’ at investing, he began frantically buying and selling stocks (no doubt making a huge amount of money for his broker – there were no cut-price brokers back then).
You can probably guess what happened next … he took a disastrous loss, desperately holding onto a losing stock, refusing to believe that his ‘natural instinct’ had let him down.
But rather than throw in the towel, from each mistake he made, Darvas formulated the rules he must trade by …
- All losses must be cut at 6% – no exceptions
- Never sell a rising stock
- Never listen to tips or stories
- Master your emotions
And, of course, using the magic Darvas boxes …
Darvas’s theory was based around the idea of buying stocks on surges of volume, and ruthlessly cutting trades when the price pulled back.
In this way he was able to do four crucial things that make for a good investor:
- hold onto established trends
- cut losses fast
- take profits regularly
- buy on renewed breakouts
And he did this with the use of ‘boxes’ – these were small areas of consolidation he drew on his charts, moving up stop levels every time the price moved into the next ‘box’.
In this image, the blue boxes are the genuine Darvas boxes – where the price has shown to consolidate. The green boxes are known as ‘ghost boxes’ – these are a more modern addition to Darvas’s theory (and not always used), allowing stops to be tightened up in between areas of consolidation.
You can add Darvas boxes to your Core Spreads charts by selecting them from the ‘Studies’ drop-down menu. And you can find Darvas’s book ‘How I Made $2 Million in the Stock Market’ online.
But what I really rate about this trading method is the ruthless way that Darvas cuts his losses. He learned to do this the hard way – yet holding onto losses is a mistake that we traders make again and again. Simply because we hate to be wrong.
The story of Nicholas Darvas is a one about all the usual errors that traders make … and how we can learn from them.
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