A Novel Approach to Trading

Information is integral for trading and markets wouldn’t run without it, but sometimes keeping on top of the constant flow of news, economic data, numbers and central bank speakers can seem overwhelming. Trying to read every piece of investment research can have a detrimental effect on traders as they get caught up in knots attempting to digest the many opposing viewpoints and trade ideas that permeate the market.

The most successful traders are not necessarily the most well-read; instead they can think clearly, formulate rational trading strategies and remain disciplined. One such trader was Nicolas Darvas. He made $2 million in 2 years trading the stock market during the bull market in the 1950’s. He wasn’t a fund manager or investment professional in fact he was a professional dancer.

Darvas was one of the first “famous” retail traders and he is a lesson in discipline and focus. He story begins after he was paid in some shares for a dancing gig in Canada. The stock was in a mining company called Brilund and he eventually sold the stock for an $8,000 profit. That was when he caught the trading bug and he set himself up with a broker account. But like any rookie trader he found that it wasn’t always that easy. In fact, after his initial success with Brilund he called himself the gambler because his trades were largely placed as a result of hints and tips he picked up at the nightclubs he happened to be dancing in.

After getting burnt on other people’s tips and “sure winners” he changed to a fundamental strategy. A trained economist in his native Hungary, Darvas read every piece of research he could get his hands on and subscribed to hundreds of investment publications to try and formulate a trading strategy armed with the advice he sought out from the industry’s professionals. But after putting his faith in the fundamentals and still incurring losses, Darvas started to regard the stock market as “a mysterious machine from which, fortunes could be extracted like the jackpot in a slot machine.”

Frightened and brow-beaten, he had to change his approach. He needed to wrest back control and differentiate himself from punters and gamblers.  This was when he developed his “box theory”. He started to look at volume first and traded stocks that had unusual volume patterns. This may have been caused by a rumoured takeover or stock split, however Darvas wasn’t interested in the reason for a change in a stock’s trading volume, he had found a rule and was on the way to making his fortune.

Darvas then  started to look at prices and cut off all contact with the investment world, only reading the magazine Barons each week and communicating with his broker once a day via telegram to get the closing prices of stocks he either held or was interested in holding. He soon started to notice that stock prices tended to move in a series of frames or boxes and oscillated fairly consistently between a low and a high point. He would analyse a stock’s price and figure out the dimensions of the box. As long as the stock price stayed within the confines of the box he was happy to leave it. But if he saw the stock price start to break out of the box that was when he got interested.

If it looked like it was on an upward trend – and his boxes were creating a pyramid effect as the price parameters kept moving higher – then Darvas was a buyer. He was essentially following price, and in trading, price is king.

His new principles were straight forward he bought a stock based on price and volume and box theory. Once he decided to buy he would next place an automatic buy-order and a stop-loss sell order. His guiding theory was that his profits had to be bigger than his losses, which is why stop-losses were so vital to Darvas.

His strategy was put to the test when he went on a world tour with his dancing partner. He had no access to market information and his only communication was through daily telegrams with his broker back on Wall Street and his weekly copy of Barrons. He would ask his broker to provide him with price information then he would cable across his orders based on the limited information he had on hand. He travelled across Asia including Hong Kong and Tokyo but also to remote places like Laos and Kathmandu in Nepal, which back in the 1950’s didn’t have a telegraph service.  He would try his hardest not to miss telegrams, but sometimes there was nothing he could do. This was Darvas’ theory at its most pure, a world away from Wall Street, which is exactly what he wanted. His world tour was also the start of his extremely successful career as a retail trader.

Thankfully Darvas documented his strategy in his book “How I made $2,000,000 in the Stock Market” first published in 1960. This was one of the first books directed at retail traders. Darvas de-bunked the markets and made them accessible to everyone, not just investment professional,  and his principals are just as relevant 50 years later. Darvas was the ultimate disciplinarian – avoiding the noise and only looking at the wood without being distracted by all of the trees. 

The key for retail traders who are busy with their day jobs is to use their time wisely. You need to be looking at the right things, not everything, to be able to see the markets clearly and make intelligent investment decisions. Analysing price, as Darvas found, is a good place to start. 

Kathleen Brooks can be contacted at

 Kathleen Brooks is research director at Prior to this she was a trading analyst for BP’s finance trading department and a financial features writer at City A.M. She is a graduate of both Trinity College Dublin and Columbia University in New York. 

She has published a book called "Kathleen Brooks on Forex"

 Kathleen Brooks is research director at Prior to this she was a trading analyst for BP’s finance trading department and a finan...


The Herittage from Mr. Darvas

Dear Kathleen!

Thanks for this article.
I am Joe Papczun, a trader and system developer.
And Darvas and his book also had some impact on my approach to the stock market.
I am also Hungarian, and really really felt every word in Mr. Daravas's book, as if it would be mine.
Probably I went through the same or similar developing trails.

A few comments to the article:

- First I would note, that discipline is as valuiable Today as it was 50 or
60 years ago to be a winner in the stock market.

- Market participants feel that they need to read and study everything,
and might easily get bogged down in the information flow, without
staying in focus.

- The time period, Mr. Darvas was operating on the market during the
fifties, was probably the simple biggest Bull market in the past 100
years, so it was much easier to be a winner during that period (And also
during the nineties) than it is Today.

- Though I know the Box theory I don't use it. It is partly obsolete, and
works well during strongly trending Bull markets, but less well or not at
all during strong Bear or sideways markets. Not to mention the
markets Today, when a lot of previously well designed strategy simply
not working, partly because of the market manipulation, caused by the
US government and the FED.
This manipulation means that usual market forces can't play out
normally, when we have a rock solid support under the market.
(Our research data at predictionwizard dat com suggest, that the
primary objective of the market manipulators during 2009 was to push
up the market as much as possible as quickly as possible.
During 2010 the game changed a bit. Now the primary objective is not
to push up the market as much as possible as quickly as possible, just
not allow the market to be pushed down. This is a big difference.)

- I would also recommend to everyone to read the Book from Mr.
Darvas. It is really entertaining, and also give the feeling of the
struggle he went through, untill finding his true niche.

- The fact, that brokers, advisers, the huge amount of public
information can mislead us and direct in the wrong direction also Valid
I would recommend everyone, who has enough time to do his / her
own research and do Not believe any market or trading - related public
material, untill verified the source or replicated with own research.
When building a trading strategy stictly rely on facts, and not beliefs.

There are a ton of common beliefs, that are simply not true Today.
If taken as facts, this might cost a lot for wanna-be traders and market
Re: A Novel Approach to Trading

Hi Kathleen,

Thanks a lot for sharing this valuable imformation with us. Im a full time trader and chartist. I still remember when started reading charts I was of the view that more indicators could able to master more would be my chances of success. This thinking and practice of mine severly hampered my trading as I was trying to digest, as you said, too many counterviews of same trade. Eventually I realiesed that if I follow only single indicator conservatively my succes rate can be more than 70%. Though in initial days it was tough to do that because it was hard to resist the market sentiments and hearsays. We cant rule out the importance of discipline in trading. Thanks again.

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