LEARN FROM GENERALS OF THE MARKETS - PART 37
“I knew now that I had to keep rigidly to the system I
had carved out for myself.” – Nicolas
Born in 1920, in Hungary, Nicolas Darvas was a popular
dancer, self-educated trader and an accomplished author. He was a good
economist at the University of Budapest. During the World War II, he didn’t
want to stay in Hungary until the country was overrun by either the Nazi
military or the Soviet military. He therefore improvised a travelling document
in 1943 (at the age of 23) and fled the country. While in Turkey, he was able
to avoid dying of hunger because he’d 50 GBP with him. Later he came across his
half-sister Julia. Julia then became his dancing team member. His troupe later
became renowned globally, with outstanding achievements in Europe and the
United States.
During his leisure times, he read many trading and
investment books, some of which are:
“ABC of Investing,” by R. C. Effinger, “Consistent Profits
In The Stock Market,” by Curtis Dahl, “Profit In The Stock Market,” by H. M.
Gartley, “The Battle for Investment Survival,” by Gerald M. Loeb (1935), and so
on. When he invested in some over-extended bull markets, the markets continue
to go northward and thus were able to give him nice profits. Thus he was able
to create the strategy that made him famous. With the strategy, he turned
$36,000 into more than $2.25 million in a 36-month period. While travelling
with his troupe, he’d check Barron’s magazine, see what the markets were doing,
and send cable/telegram messages to his broker in New York, so that new trades
could be executed in his behalf. He made use of the latest technology of his
days, for there was no internet.
Which strategy did Nicolas use to tackle the uncertainty of
the markets? His strategy was based on the popular Box Theory. With this kind of theory, certain price actions were
seen as a series of boxes. Whenever the price was in a box, he stayed out of
the market. But once the price broke out northward from inside the box, he went
long, setting a stop according to his rule. More information about the Box
Theory would be found in some other articles. Nicolas himself explains in
details how he used that strategy in his book titled: “How I Made 2,000,000 in
the Stock Market” (1960). His other books are:
“Wall Street: The Other Las Vegas” (1964), “The Anatomy of Success”
(1965), “The Darvas System for Over-The-Counter Profits” (1971) and “You Can
Still Make It in the Market” (1977).
He died in 1977, at the age of 57.
Lessons
What lessons can be learned from this famous dancer, author
and trader? Here are some of them:
- A normal market
must be a two-way market (a market in which you can either go long or
short). Go long in a bull market and go short in a bear market and do it
right. Nicolas Darvas was a permabull, for short-selling didn’t fit his
mindset, but he acknowledged that his Box Theory could be used conversely
for taking advantage of bear markets. Bear markets proffer fast
profit-making opportunities and savvy speculators ought to consider this
fact. Don’t buy in bear markets; otherwise, stay out of the markets.
- If you’re a
successful trader, the psychological principles that enable you to trade
successfully can also be used to achieve your goals in other business.
There are market wizards who’re also successful academicians, businessmen,
programmers, sportsmen, etc. There are people like James Simons and
William O'Neil out there. Nicolas believed that the formula for success
remains essentially the same.
- Nicolas invested
in shares of companies that had good growth potential, like electronics
and missile industries in his days. He called himself a techno-fundamental
trader, which means that a combination of technical and fundamental
analysis is good.
- You see,
strategies that work will continue to work irrespective of how old
they’re. Nicolas Box method still works perfectly in today’s markets.
Whenever he saw a signal, he quickly sent orders for trades to be opened.
Like many traders today, he didn’t hesitate, for he knew that the trend is
the trader’s buddy. Many traders today would be reluctant to open trades
because they know too much (often conflicting ideas). The problem most of
us face right now is the availability of too much knowledge. Nicolas
bought mainly because the he saw bullish signals on his chart, and in
reality, whatever worked effectively in the past may also be effective in
the future. The Box Theory was created tens of years ago, yet it still
works. This is because the Theory showcases the speculators’ mindset and
weaknesses. Yes, old legendary trading strategies can still work if
they’re stuck to faithfully.
- There are exit
and exit plans in every trading system. If studied very well, it’d be seen
that the Box method has entry and exit plans. The best exit method in any
system is the stop loss. Nicolas decided to let his stop loss decide when
to exit in a bull market.
- Analysis is
good, but it doesn’t predict the market. So there’s a big difference between
analysis and market prediction. This must be borne in mind. Like technical
analysis, all what fundamental analysis can let you know are the facts of
yesterday and today, not what must happen tomorrow.
- Don’t be
overconfident in the market, no matter how good your trading system is or
how favorably the markets have treated you. Overconfidence is definitely
not a good thing. Nicolas said that’s the most harmful mindset that can be
developed by any trader.
Conclusion: Your
trading career would bring out the best and the worst in you; therefore you’d
do well to come to terms with your strong and weak points before you stake your
neck. This would enable you to do things that could bring out the best in you
and avoid things that could bring the worst in you. With this method, you’ll be
able to render your weak points ineffectual, so that they don’t have any
adverse effects on your trading.
This piece is ended with another quote from Nicolas:
“I was successful in taking larger profits than losses in
proportion to the amounts invested.”
Azeez Mustapha
Market Analyst, Trading Signals Provider and Coach
