The short version
Nicolas Darvas bought stocks that were rising to new highs, and only at a precise moment: when the price broke out of a "box" it had been bouncing around in. He set a stop just under the box, raised it as the stock climbed into new boxes, and sold the moment a stock fell through one. He kept his losses small and let his winners run, and it made him rich.
Who he was
Darvas was a Hungarian-born dancer who, with his partner, performed in nightclubs around the world. In the 1950s he started buying US stocks, lost money on tips and rumours, and then built his own method from studying price and volume. Over a few years in the late 1950s he turned his savings into about $2 million, much of it while on tour, reading stock prices in cables and placing orders by telegram. His book, How I Made $2,000,000 in the Stock Market, came out in 1960 and is still widely read.
How he started
His start in the market was an accident. In the early 1950s, a nightclub in Toronto offered to pay him for a performance in shares of a small Canadian mining company instead of cash. He accepted, more or less forgot about them, and a couple of months later found they had risen several times over. He sold, and decided the stock market was an easy way to make money.
It wasn't. For the next few years he lost money following tips, brokers' advice and newsletters, then tried picking stocks on company fundamentals alone, and lost again. Only when he started studying how prices and volume behaved did he find something that worked.
The box
After a stock makes a new high, it usually stops and moves back and forth in a range. Darvas drew a box around that range: the top was the high the stock couldn't get above for a few days, the bottom was the low it held. As long as the price stayed inside, he did nothing. When it pushed through the top of the box on rising volume, he bought.
- Only stocks making new highs, ideally in a growing industry
- Wait for a box: a range with a clear ceiling and floor
- Buy as price breaks above the ceiling on rising volume
- Set a stop just below the floor of the box
- As new, higher boxes form, raise the stop to the floor of the newest one
- Sell when a stock falls through the floor of its box, without arguing
Stops, set the moment he bought
Darvas treated the stop-loss order as part of every purchase. He placed one the moment he bought, just under the floor of the box, so a breakout that failed cost him only a little. As the stock rose into new boxes he raised the stop to the floor of each new one, never lowered it. Most of his trades were small losses or small gains; a handful of big winners made the fortune.
His distance from Wall Street helped: on tour he couldn't hear the gossip, so he had to rely on the prices alone.
The stocks that made him rich
His big winners were growth companies of the late 1950s in new industries, many in electronics. Among the names in his book are Thiokol, Universal Controls, Lorillard and E.L. Bruce. In each case the pattern was the same: a stock reaching new highs, pausing in a box, and breaking out on volume, often more than once.
Why it still works
The box method is an early version of almost every breakout system that came after it. A stock at a new high has no one above it waiting to sell at break-even; a tight range shows supply drying up; volume on the breakout shows demand arriving. And the stop under the floor turns each trade into a small, known risk. Mark Minervini's volatility contraction and Qullamaggie's breakouts are the same idea, refined.
His books
- How I Made $2,000,000 in the Stock Market (1960): the story and the method, and still the place to start.
- Wall Street: The Other Las Vegas (1964): his warning about tips, rumours, brokers' advice and the other ways ordinary investors lose money.
US stocks closing at a new 52-week high out of a tight 10-session box, on heavy volume, after every close.
Questions people ask
Who was Nicolas Darvas?
A Hungarian-born professional dancer (1920 to 1977) who, in the 1950s, taught himself to trade US stocks and made about $2 million, much of it while on tour and trading by telegram. He told the story in How I Made $2,000,000 in the Stock Market (1960).
What is the Darvas box method?
Buy stocks making new highs, but only when they break out of a box: a range where the price has settled between a ceiling and a floor. Buy as price breaks above the ceiling on rising volume, set a stop just below the floor, and raise the stop as new, higher boxes form.
Did Darvas look at company earnings?
Yes. He called himself a techno-fundamentalist: price and volume told him when to buy, and he preferred companies whose earnings were growing, often in new industries of the day such as electronics.
How did Nicolas Darvas start trading?
In the early 1950s a nightclub in Toronto paid him for a performance in shares of a small Canadian mining company instead of cash. The shares rose several times over, and the gain got him interested in the market.
Where did Darvas place his stop-loss?
Just below the floor of the box the stock had broken out of. He entered the stop the moment he bought, and as the stock climbed into new, higher boxes he raised it to the floor of the newest one.