I want to share a fantastic book with you today that I have just finished for about the 4th time. Actually, this time round I bought the audiobook. I find audiobooks easier to consume these days.
It is a detailed account from the 1950’s in which Nicolas Darvas made over $2,000,000 trading the stock market. It follows a part of his life over almost 8 years showing all his stock operations which lead to the final 18 month period when he turned $25,000 into $2,250,000.
A Personal Favourite
This book really resonates with me and has impacted my own trading career. I first read it over 6 years ago and learnt some valuable lessons.
At the time I first read it, I had a full time day job. I was, and still am a tradesman. Nicolas Darvas was a professional dancer, performing in clubs all around the world. He made his fortune trading stocks via stop orders given to his broker and only ever used the closing prices of each stock to make his trading decisions out of market hours or “while Wall Street slept”
This approach has many similarities to the methods I use to trade today.
How He Made His Fortune
Darvas first got interested in the operations of the Stock Market in 1952 after a client offered to pay him in shares of a Canadian mining stock called Brilund.
Much to his surprise, two months later when Darvas looked at the stock price of Brilund for the first time, it had gone up quickly making him a potential $8000 in profits. He sold out and took the profit immediately.
He was hooked on trading the stock market there after, just as all of us after our first trading profit.
Following this first very decent profit, Darvas set out in search of more good stock to buy. He asked everyone he came in contact with if they had any stock tips. But after a painful period of jumping in and out of these tipped stocks, racking up nothing but losses, he realised that he could never get rich trading from tips and rumours.
The same principles most definitely apply today.
Educated Stock Picking
Tips weren’t working. So Darvas turned to fundamentals. He spent hours searching the strongest industry groups and then the strongest stocks within the strongest industry groups. These were the stocks that had to rise. But again he lost money. He might have picked the right stocks but had entered and exited at the wrong time.
Box Theory
Eventually Darvas had come to the conclusion that buying the right stock meant nothing unless he bought at the right time. This lead him to develop his Box Theory which was the backbone of his strategy which went on to make him $2,000,000.
It was a theory based on price action. Simplified, it was a strategy which bought into stocks moving strongly upward or buying breakouts to new highs. Darvas then determined a box or range of price action and if the stock fell back below then he would immediately sell and take a small loss. If prices broke to a new high or into a new box then he would add to his position by buying more stock. The stop loss level was always moved up with the new box, locking in profits as prices rose.
All of this trading was done thousands of miles from Wall Street from wherever Darvas was performing in the world at the time. His buy and sell orders were delivered to his brokers via Cables; a way of sending written messages all round the world.
$100,000 Loss In 3 Weeks
Up to this point, the Box Theory had made Darvas his first $500,000. All via Stop Orders sent far from Wall Street. Darvas spoke to no-one and listened to no news or rumours about the markets from his international hotel rooms. All he studied were the closing prices of stocks each night from the newspaper.
During a break in his dancing Darvas returned to New York filled with confidence in his new theory.
He mistakenly assumed that if he had been able to make half a million dollars, thousands of miles from Wall Street, then he was certain to make much more now he was amongst the action.
Within a few weeks of trading along side all the rest of Wall Street, Darvas managed to lose nearly $100,000.
Back On Track. $2,000,000
Darvas took time out to reflect on what had happened. He had completely neglected his rules and strategies which had previously made him a fortune. In New York he began listening to rumours and reading the news and began to trade recklessly.
From that point on he was to trade only a few blocks away from his hotel room however this time he forbid his brokers to ring him, listened to no rumours and read no news. The only contact he had with the markets was the daily closing prices in the newspaper. He went to work each night when the stock markets closed.
His Box Theory began to work once again. And this time he was to make in excess of $2,000,000.
Would You Like To Trade Like Nicolas Darvas?
I love to read about how people made their fortune. If you’d like to learn more about how Darvas’ Box Theory made him his fortune then you can get the book here.
I learnt some valuable lessons from his story and still apply them in my own trading today.
If you would like to discuss or have any questions on his story then please leave comments down below. And as always, thanks for reading.
Jarrod