Friday, September 20, 2013

Nicolas Darvas: His Timeless Trading Strategy


“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.

What lessons can be learned from this famous dancer, author and trader? Here are some of them:

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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

Eye-opening trading lessons: Lessons from Expert Traders

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