NICOLAS DARVAS Box Trading Strategy - Darvas Box Method - How I Made 2 Million In The Stock Market

Summary

Nicholas Davis, author of 'How I Made Two Million Dollars in the Stock Market,' developed the Darvis Method, a trend-following strategy that focuses on price and volume. Davis’ system revolves around identifying 'boxes' on stock charts, using breakouts to enter trades and setting stop-loss orders to manage risk. He emphasizes disciplined risk management, pyramiding, and capturing part of a stock's price move rather than trying to buy at the absolute low or sell at the peak. This method, tested on both past and modern stocks like Amazon, has proven successful, offering a high risk-to-reward ratio for traders.

Takeaways

• 😀 Davis's Darvis Box System is a trend-following strategy based on price and volume analysis, aimed at capturing substantial market moves.
• 😀 The system involves identifying a box formed by a 52-week high (resistance) and a retracement (support) to create a clear trading range.
• 😀 Breakouts above the resistance line trigger buy orders, while stop-loss orders are placed below the support line to limit potential losses.
• 😀 Davis never tries to buy at the lowest or sell at the highest price, but instead aims to capture some of the market's move with sound risk management.
• 😀 Proper risk management is crucial; Davis’s method emphasizes limiting risk to a small percentage (e.g., 2%) per trade.
• 😀 The risk-reward ratio of the Darvis Box Strategy can be as high as 14:1, as demonstrated in real-life case studies like Lorillard.
• 😀 Pyramiding is a strategy used by Davis to add more positions as the trade becomes profitable, increasing the position size as the trend progresses.
• 😀 The Darvis Box System can be applied to various timeframes and is still relevant for trading in today's market.
• 😀 A focus on volume is essential; Davis looks for volume spikes to confirm breakouts and ensure the strength of the trend.
• 😀 The strategy requires patience and discipline; traders must wait for the right setup and avoid impulsive decisions based on market fluctuations.
• 😀 Davis emphasizes the importance of controlling risk and improving the odds in your favor, making the system accessible for traders at all levels.

Q & A

What is the 'Box system' developed by Nicholas Davis?

The 'Box system' is a trend-following stock trading strategy that focuses on identifying price and volume patterns to enter trades at breakout points. The strategy involves creating a 'box' by identifying support and resistance levels, and entering trades when the price breaks above resistance, with a stop-loss below support to manage risk.

How does Nicholas Davis' background influence his trading strategy?

Nicholas Davis' background as a professional dancer and economist shaped his approach to trading. His work ethic, disciplined study habits, and methodical thinking from his dancing career translated into his structured, risk-conscious approach to stock trading. He combined knowledge from over 200 books and techniques from Jesse Livermore to create his 'Box system'.

Why is managing risk so important in the Box system?

Risk management is crucial in the Box system because it ensures that traders protect themselves from significant losses while still capturing potential gains. By placing stop-loss orders, Davis minimizes the downside risk of a trade, focusing on a high reward-to-risk ratio, which increases the probability of long-term success in the stock market.

What is the role of volume in the Box system?

Volume plays a key role in confirming the validity of a breakout in the Box system. Nicholas Davis emphasizes that a breakout above resistance should be accompanied by an increase in volume, as this indicates strong market conviction behind the price movement, making the trade more likely to succeed.

How does the Box system help traders avoid large unpredictable declines?

The Box system helps traders avoid large unpredictable declines by using stop-loss orders to limit losses. These stop-losses are placed just below the support level within the box, ensuring that traders exit positions quickly if the market moves against them, thus minimizing the impact of unpredictable downturns.

What is the difference between a gambler, a novice trader, and a professional trader in terms of risk management?

A gambler has no control over the probability or risk of an outcome, which makes their bets purely random. A novice trader may improve their probability by recognizing patterns like support and resistance but still has no control over their risk without a stop-loss. A professional trader, however, applies risk control (e.g., stop-losses) to limit potential losses, improving both the probability of success and managing risk effectively.

How does the 'pyramiding' strategy fit into the Box system?

Pyramiding is the strategy of adding to a position as the trade progresses and moves in the trader's favor. In the Box system, this involves buying more shares when the price continues to rise and a new box forms, and then adjusting the stop-loss accordingly. This allows traders to increase their exposure to a profitable trend while still controlling risk.

What is the ideal risk-to-reward ratio in the Box system?

The ideal risk-to-reward ratio in the Box system is around 12:1 or better. This means that the potential reward from a trade should be at least twelve times greater than the potential risk. Davis focuses on minimizing risk by using stop-loss orders while aiming for substantial gains.

Can the Box system be applied to different timeframes and stocks?

Yes, the Box system can be applied to any timeframe, as it is a flexible strategy that relies on price and volume patterns rather than specific time constraints. Davis demonstrated its effectiveness using various stocks, including Amazon and Genus, showing that it can be applied across different timeframes and market conditions.

What does Nicholas Davis mean when he says, 'I have no ego in the stock market'?

When Davis says, 'I have no ego in the stock market,' he means that he is not afraid to admit mistakes and quickly cut losses when a trade goes wrong. This mindset helps him stay disciplined and prevent emotional decision-making, which is essential for long-term success in trading.