February 10

How Stock Trading Legend Nicolas Darvas Saved His Fortune (And How You Can Too)


I have recently designed a new Short Selling strategy for stocks.  I am ready to start testing RS27 in realtime.  However, it has been nearly 6 weeks and I have not taken a trade using this strategy yet.  The reason is the main market conditions are not right.

I have stated many times that certain strategies work best (and worst) in certain market types.  I understand the mechanics of how this strategy works and I also know form experience that this type of strategy doesn’t work well in Choppy Volatile markets.  It performs better in quieter, trending markets.


Market Type Over The Last 6 Weeks


sp500 8:2:15


By looking at the chart I have shared you can see that since the start of this year, the market has been moving in a sideways fashion.  In fact, the most recent closing price is just a few points away from the closing price on January 2nd, the first trading day of the year.

The Average True Range or the difference between the high and low of each day is a good measure of volatility and it is clear that it has been significantly increasing over the past few months.

Should volatility start to decrease within the next few weeks the I will begin to trade and test this new strategy.


What Has This Got To Do With A Legend?


I have read many books on trading.  Including ones on theory, strategy, psychology, position sizing but also real accounts of real traders.  A favourite of mine and a recommended read is that of Nicolas Darvas.

Darvas traded stocks and developed a theory or strategy which was based purely on price action.  He would not be influenced by any fundamental information or listen to any rumours.  This “box theory” lead him to making his fortune of over $2,000,000.  Very impressive today but much more so for him over 50 years ago!


No Trades Is A Viable Position


So over the years Darvas had developed a very profitable strategy to trade stocks.  However in the summer of 1957 he made a string of trades according to his theory and saw every one turn into a small loss.  These results were not in line with his normal performance.  He was taking trades according to his rules but the stocks just weren’t behaving as they had in the past.

By August of 1957 Darvas found himself in the position of owning zero stocks.  This was an unusual position for him to be in.  But after that string of losses he could not now find any potential trades to make.  Something had changed.

He spent a matter of weeks without any positions while he just watched the markets, waiting until the stronger stocks started to behave in a manor in which he could buy and profit from them.

He didn’t realise at the time but that period of small losses and lack of trading opportunity was the end of the great Bull Market.  While he found it impossible to recognise this turning point in the market at the time, sticking closely to the rules of his theory did a pretty good job at signalling the market change.

By standing aside or sitting on the sidelines with no money invested, Darvas saved himself from what could have been a massive loss to his account during the beginning of the Bear Market in which the majority of investors lost money spectacularly.

Nicolas Darvas


By sharing this part of Darvas’ story with you there can be lessons to be learnt:

  • Monitor the performance of your trading and when things aren’t quite working out as expected then maybe market conditions are changing.
  • Know in what market conditions your strategies work well and more importantly, not so well.
  • Don’t be afraid to stand aside (no money invested)
  • Standing aside is a position just as being long or being short are.


In addition to the main points above, I would also like to point out another crucial part of Darvas’ success.  And that was his use of stop losses.  His “box theory” or strategy gave clear price levels at which he knew if prices fell below then the stock wasn’t acting right and it was time to get out at a small loss.

He was able to take a handful of losses in a row without putting a big dent in his account and in time for him to realise something wasn’t quite right.  He could then sit out and observe the markets with his preserved trading capital while many other traders held on and on to their losing positions.


Thanks for taking the time to read today’s article and I hope you can make use of the points I’ve mentioned.  They helped improve my trading and hopefully your’s too.

Keep checking back for updates on my strategies currently being tested and please ask me any questions or leave any comments below or at jarrod@thetransparenttrader.com




Featured image by thefool0803 via Flickr.com


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