In late 1956, Nicholas Darvas proceeded on a world tour. He was a successful professional dancer. He had previously made a little money in the stock market. In the next 18 months, he placed a sequence of stock trades by telegram even as he continued to travel and perform. He started with a modest stake of $10,000, which he could afford to lose. When he returned to the USA, that initial stake had grown into more than $2,000,000.
What made the performance even more amazing was that Darvas was not a professional investor and devoted little more than an hour a week to pick his investments and review his portfolio. He was trading on data that was usually dated by at least a week and sometimes by considerably more.
Wherever he was, Darvas would check in at the nearest US Embassy and demand an airmailed copy of the Wall Street Journal and Barrons. He would ignore everything except the stock quotes. And, he would place his orders on a purely technically method that didn't even require charts. He had no idea whatsoever what the companies he bought, did. Yet he found himself with a completely upwardly mobile portfolio and he sold out at the top of one of the biggest bull markets in history.
Among his picks Darvas chose Kent cigarettes, which had just introduced the menthol filter. This was a huge success. Another company he identified long before the analysts was Diners Club, which had just introduced a photo-credit card. Another duo of Darvas picks were Raytheon and Thiokol Chemicals, both specialty-engineering firms that benefited hugely from a combination of the space race and the arms race. Another company that Darvas liked was Texas Instruments, which had just introduced the first clunky electronic version of the calculator.
Not only were these great fundamental picks of small companies just as they made breakthroughs that turned them into very blue-chips, Darvas also timed these trades near-perfectly from the technical viewpoint. How did he do it? He explained all in his classic "How I made $2,000,000 on the stock exchange".
Darvas had started investing as a pure fundamentalist. He then tried some technical investing. Then he attempted to combine the two. By the time he embarked on his tour, he was convinced that technicals worked best for him. Also, there was the practical difficulty of researching American companies while sitting in Nepal or India circa 1957.
He stuck to technical price and volume data which he could get, albeit with a large timelag. His identifying signal was a large volume expansion that suggested a surge in demand. Then he would watch the stock. If it rose in price, he would cable a buy order with an in-built stop loss.
He would set what he called a "box" which is an acceptable trading range. If the stock stayed within that range he would continue to watch it with his position still live. If the stock fell out of that range, he would sell it automatically with a stop loss order. If the stock rose out of the range, particularly on large volumes, then Darvas would buy more.
This time, he would use a trailing stop loss. His second order would raise the level of the stop loss order. This would be set slightly below the bottom of the "new box" in which the stock traded. If the stock rose again, he would move up the trailing stop-loss. Actually this ensured an automatic booking of profit of the stock before it started to lose ground. If the stock continued to gain, Darvas' system would not allow a sell.
The box with the trailing stop-loss works pretty well, provided you pick the stock with the right sort of trading pattern and also select the right support-resistance levels for the trading range. The amazing thing is that Darvas had the mental vision to do this without drawing charts. A Point & Figure chart can also help at perfecting this box theory. Obviously the support-resistance zones must be wider if dealing with a more volatile stock.
Darvas says he worked out his boxes by comparing previous observations of stocks and using "trial and error". The other interesting thing is that Darvas could trade so successfully in such a leisurely fashion while using a completely technical system.
His success is possibly the greatest example of the complete scalability of technical analysis (TA). Normally TA is used to trade short timeframes. But it can also be adapted to long timeframes. Several people have modified Darvas's methods to write computerised trading programs. These are used in forex markets and in futures with one-minute timeframes! The key factors are to query for volume expansion and then follow the stock until the range can be set. In the commercially available programs, the options for setting ranges range from the simply visual to sophisticated statistical analysis.
I discovered Mr. Darvas quite by accident and soon learned that his book was consistently referenced by William O'neil in IBD.
So what I am hoping to accomplish is a spirited discussion and development of the Darvas method.