The Darvas Method is my favorite trading method and one I've been using for the past 7 years to make consistent returns from the market. It involves the use of a unique setup that integrates a volume spike with a rising stock price into a powerful trading system that incorporates entry timing, stop loss placement and exit timing. It is the creation of the legendary trader Nicolas Darvas in the 1950ís and is used to capture long term growth of leading stocks in the strongest industry groups.
For anyone that has not applied this method in their own trading I suggest you have a read of Darvas's book, "How I Made 2 Million in the Stockmarket" -it's a timeless classic containing invaluable market lessons and insight.
For a stock to qualify as a potential Darvas trade, it first has to exhibit a proof of changed behavior in the form of a recent volume change of at least a 400% increase compared to the average daily volume for the past few weeks. The stock must also be rising in price and make a new yearly high. The Darvas Box upper and lower boundaries will then form if this high is not touched or penetrated for the next 3 consecutive trading days followed by a retracement low thatís not touched or penetrated for a further 3 days in a row, as shown in the picture below. Darvas tells us that sometimes the top and bottom of the box may form on the same day. In such a case, the requirement is that neither the high nor the low of that day are touched or penetrated for 3 consecutive trading days.
Once a box forms, I place a buy stop order to purchase my stock the moment it pushes through the top of the box. At the same time, I enter an automatic stop loss order just below the bottom of the box to protect my position. As the prices increase and new boxes form, I trail my stop loss just under the bottom of each new box to lock in the profits. One aspect of this trading method that made Darvas so successful is the pyramiding of position by buying more stock on the breakout of subsequent boxes Ė a very powerful technique to maximize returns in a winning trade!