Donnelly Editor of DarvasTrader. What is the Darvas System and how has it evolved since being introduced 50 years ago? In a nutshell, the Darvas System is a trend-trading system created by Nicolas Darvas in the late s. Today, top traders use it to find the market's fastest-moving growth stocks and ride their trends to profits. While a Darvas trader will always cut his losses quickly, most winning trades are held for a period of several weeks or months.
The goal of Nicolas Darvas' system was to invest only in stocks with the potential to double, triple, or quadruple over the next six to 12 months. He developed a list of criteria which he found to be most indicative of the potential he was looking for.
The following characteristics are presented in their order of importance according to Darvas: How does Darvas describe his Box Theory? Notice here that Darvas explains his theory as a series of price ranges OR boxes, thus implying that the Darvas Boxes shouldn't be applied too rigidly. A lot of work goes into properly defining these Darvas Boxes, but for now, simply understand that Darvas was looking for stocks that developed recognizable price ranges — areas of support and resistance.
And, he wanted to see these price ranges trending higher and higher — in other words, he wanted to see higher highs and higher lows. That is the Darvas System in its simplest terms. Big institutions — mutual funds, hedge funds, pension funds, trust funds, etc. This is why an individual trader has a huge advantage over a large institutional fund manager.
Because of their size, institutions are unable to get in and out of positions quickly, but an individual trader has this capability. An individual can ride the trend on the way up and easily get out before the institutions have time to unload their huge positions. Of course, having an account that large would be a good problem to have for most individual traders. Some of you may be noticing the many similarities between the Darvas System and William J.
Therefore, we offer a new, easy-to-remember acronym for the Darvas System: Is the market, as a whole, in an uptrend? It is highly unlikely that a stock will have huge gains when the overall market is in a downtrend, so make sure the direction of the market is moving upward. Is the company seeing increases in earnings and sales this quarter compared to the same quarter last year? And remember, the higher the increase in earnings and sales, the better. Is the stock outperforming most other stocks in terms of its price increase?
If a stock has already increased a great deal over the past year, most investors are fearful of a steep decline, but many studies have shown that Darvas was right in his assessment; if a stock had already made a powerful move, it proved that it had the ability to move in such a fashion and therefore, was likely to do it again.
Another important characteristic of ideal Darvas stocks is a high Return on Equity. Fund managers love to see a high ROE. Some put a higher value on ROE than they do earnings and sales. And just like when it comes to earnings and sales, the higher the ROE is, the better outlook for the stock.
Is volume increasing on up days, particularly on the day when the stock breaks into new highs? Volume can tell you so much about a stock. Ideally, you want to see much higher-than-normal volume when a stock breaks into new highs and lower volume when the stock declines.
Is the stock a member of an industry group that has been increasing in price more rapidly than most other groups?
At any given time in the market, there are certain groups and sectors that are very hot. Make sure your stocks are members of these hot groups. Is the stock breaking out of a sound base pattern? You want to buy stocks that are breaking out of old price ranges and into new, higher price ranges.
You also want to sell stocks that are falling down into lower price ranges. If a stock meets all of the above criteria, it is potentially a huge winner. Remember, as Darvas said, the only reason to buy a stock is if this price of that stock is going up. He was only interested in stocks that could double, triple, or quadruple over the next six to 12 months. If you concentrate your stock selections to these types of stocks, you too may soon join the growing list of Darvas Millionaires.
Unfortunately, most traders lack the discipline to stick with these strict requirements. When you subscribe, you'll receive " Secrets of the Darvas Trading System " absolutely free! The material provided by the DarvasTraderPro. The information contained on the DarvasTraderPro. We are NOT an investment advisory service, a registered investment advisor, or a broker-dealer. You are solely responsible for your own investment decisions.
The testimonials, earnings examples, and "success stories" used on this website are exceptional results and do not apply to the average individual and are not intended to represent or guarantee that anyone will achieve the same or similar results. The success of each individual depends on his or her background, experience, dedication, desire and motivation. As with any business endeavor or financial transaction, there is an inherent risk of loss of capital and there is no guarantee that you will earn any money.
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Charts on this Site courtesy of StockCharts. A — Accelerated Earnings and Sales Is the company seeing increases in earnings and sales this quarter compared to the same quarter last year?
R — Relative Price Strength and Return on Equity Is the stock outperforming most other stocks in terms of its price increase? V — Volume Increasing Is volume increasing on up days, particularly on the day when the stock breaks into new highs?
A — Aggressive Growth Group Is the stock a member of an industry group that has been increasing in price more rapidly than most other groups? S — Sound Base Pattern Is the stock breaking out of a sound base pattern?More...