The Darvas Box Theory is based on a combination of technical analysis and strict trading rules. Here are the key elements of the Darvas Box Theory:
#Selection of Stocks:
Darvas looked for stocks that had the potential for strong price movements. He focused on stocks with a history of significant price increases and volume expansion.
#Box Formation:
Darvas used a box to represent a trading range. The box is formed when the stock's price moves between a high and low range for an extended period. The upper boundary of the box is the resistance level, and the lower boundary is the support level. Darvas would buy when the stock broke out of the box to the upside.
#Volume Confirmation:
Darvas believed in using volume as a confirmation indicator. He looked for increased volume when the stock broke out of the box, indicating strong buying interest. Low volume during consolidation phases was considered a sign of a weak trend.
#Stop-Loss Orders:
Darvas was disciplined about using stop-loss orders to protect his capital. He would place a stop-loss just below the lower boundary of the box after a breakout. If the stock fell back into the box, the stop-loss would trigger, limiting potential losses.
#Riding Winners:
Darvas was known for holding onto winning trades and letting profits run. He would adjust his stop-loss orders to lock in gains as the stock price continued to rise.
#Continuous Monitoring:
Darvas closely monitored the stocks in his portfolio, keeping track of price movements and volume. He followed a systematic approach and was known to be disciplined in executing his trades.