Darvas Box Trading Simplified

[bbrijesh]

How do you find trading stocks when markets are trending at an all-time high?

A trader is constantly in fear of the downside when the market is trading at an all-time high, like the rally we witnessed this week.

There are a few questions in his mind:

1. The market is overheated, should I buy now?
2. What if the market retraces or reverses from the current level?
3. The stop-losses are deep, is it the right time to enter the market?

All these questions might be in your mind too, right?

It's always difficult to catch the running markets, be it bullish or bearish. As Paul Tudor Jones said, “The meat is not in the middle of the trend but it is when you catch tops and bottoms.”

He is Paul Tudor Jones - a successful trader, but catching tops and bottoms is not everyone’s cup of tea.

Some traders wish to play the momentum and catch the trend as much as they can.
For them, this is one study you should look at – it is Darvas Box.

The Darvas Box is a technical analysis tool used in stock trading by Nicolas Darvas, a dancer turned self-taught investor. Darvas achieved significant success in the stock market during the 1950s, and he detailed his trading methods in his book, "How I Made $2,000,000 in the Stock Market."

The Darvas Box visually represents price movements and helps traders identify potential breakout and breakdown points. The method is based on the idea that stocks tend to trade within a specific range before making a significant move. The key components of the Darvas Box include:

1. Box Formation:
Darvas identified a stock trading in a narrow price range, forming a box on the price chart. This box is created by drawing horizontal lines at the upper and lower boundaries of the recent trading range.

2. Volume Confirmation:
Darvas also paid attention to the volume associated with the stock's price movements. He believed that a breakout or breakdown from the box should be accompanied by increased volume, confirming the move's strength.

3. Buy Signal:
Darvas would initiate a buy position when the stock's price broke out above the upper boundary of the box, and this breakout was confirmed by higher-than-average trading volume.

4. Stop-Loss Placement:
To manage risk, Darvas set a stop-loss just below the lower boundary of the box. He would exit the trade to limit losses if the price fell back into the box, indicating a potential false breakout.

5. Trailing the Box:
As the stock price continued to rise, Darvas would adjust the upper boundary of the box to capture the ongoing trend. This allowed him to ride the upward momentum while protecting profits by adjusting the stop-loss.

6. Sell Signal:
Darvas would sell his position when the price fell below the lower boundary of the box on increased volume, signalling a potential reversal or breakdown.

It's important to note that while the Darvas Box method gained popularity and has been used by some traders, it is not foolproof. Like any trading strategy, it comes with risks, and market conditions can change.

Traders should consider using the Darvas Box as part of a comprehensive trading plan and incorporate risk management techniques to enhance their chances of success.

At Definedge, we believe in simplifying the trading experience with our unique trading platforms, Trade Point and RZone.

We have an inbuilt Smart Scanner to filter the stocks at the ceiling or break out of the Darvas Box.

Ceiling:
The ceiling, also known as the "top" or "upper boundary," is the highest price level a stock reaches within a specific period. In the context of the Darvas Box, the upper limit of the price range forms a box on the chart.

Breakout:
The breakout occurs when the stock's price moves above the upper boundary or ceiling of the Darvas Box. This is a crucial event for traders following the Darvas method, as it signals a potential upward trend and an opportunity to enter a long (buy) position.
While using a scanner, the user needs to select the breakout stocks or stocks on the verge of breakout (ceiling).

Here is how you can go to the Darvas Box scanner.

The sample result from the scanner is attached from the group of NSE All Indices.

Source: Tradepoint, Definedge Securities

If you use the Darvas Box scanner, share your experience in the comment below.

[bbrijesh]

Here is the list of stocks trending around the Ceiling of Darvas Box on an hourly chart. This is generated using Darvas Box scanner.