Darvas Box Theory

What is the Darvas Box Theory?

The Darvas Box Theory is a type of Trading Strategy that was introduced by Nicolas Darvas. As per the Darvas Box Theory meaning, it is aimed at targeting stocks with the help of highs while using volume as the major indicator. Darvas had developed the given theory during the 1950s, when he was traveling around the world in the form of a professional ballroom dancer.

The trading technique that Darvas made use of was the practice of buying into relevant stocks. He invested in stocks that would be trading at highs while drawing a box around the latest highs & lows for establishing entry point & the placement of stop-loss order. A typical stock is regarded to be placed in the Darvas box when the respective price action tends to rise above the previous high. However, on the other hand, it tends to fall back to the price that is not too far from the current high.

What is the Darvas Box Theory Meaning?

The Darvas Box Theory is regarded as a type of momentum theory or strategy. The given theory is known to make use of the Market momentum strategy in addition to Technical Analysis for determining when it is the right time to enter or exit the given market. Darvas boxes tend to be the plain indicators that are usually created by simply drawing a line along with both the highs & the lows for making the box.

As the highs and lows are updated over time, it is observed that the rising boxes and falling boxes are created in the process. The given theory is known to suggest that only trading with the help of rising boxes while using the highs of the give boxes that might be breached for updating the stop-loss orders.

Even after serving as a major technical strategy, the Darvas Box Theory is also known to mix with some conventional theories for determining what stocks are expected to target. Darvas believed that the given method used to work the best when the same is applied to industries having the greatest potential to bring in investors as well as consumers with cutting-edge products. He also made it important to prefer companies that revealed stronger Earnings over the period of time –especially if the overall market appeared to be choppy.

The Darvas Box Theory in Practical Application

The given theory is known to encourage the traders to emphasize the industries that are growing –implying the industries in which the investors think that they could outperform in the given market. During the development of the given system, Darvas moved forward by selecting a few stocks from the given industries and analyzed the overall prices as well as trading on a daily Basis. During the monitoring of such stocks, Darvas made use of volumes as the major indicator to determine whether or not the stock was perfect to make the next move.