Trend is a blog about global daily, weekly, monthly and yearly market trends in such financial markets as Forex, stocks and commodities as well as various day, swing and Forex trading strategies and ways to invest your money. In the blog I am going to share what happens in these markets on a daily basis. I hope you will enjoy my trend analysis. Welcome to my blog.
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Tuesday, September 11, 2012
Nicolas Darvas trading system
"There are no good or bad stocks, there are only rising and falling
stocks" by Nicolas Darvas.
In my humble opinion anyone
who wants to make money trading has to learn from those who have already done
that. There are a lot of books written on successful trading. However, most
authors have not made any money in the market. They simply write about those
who managed to do so by trying to analyze their methods or they present
strategies and systems that they believe to be working. When you pick up a book
and start reading after a while you will start feeling whether the author
himself trades or not. If he does not he will only be sharing theory with you.
You need more than that. You should listen to those who made it. Let them be your
mentors. Read their books and learn their trading style. Try to understand what
made them successful and then by imitating them try to find your own unique
trading style. I am intending to start a series of articles about some of the
most successful traders and they way they made millions in financial markets. I
hope you will benefit from these. Today’s topic is Nicolas Darvas trading
system. START COPYING POPULAR INVESTORS ON eTORO NOW
How it all began
Nicolas Darvas was a
professional dancer (anyone can do it) who came to trade stocks by accident. At
some point in his career he got an unusual offer. People who invited him to
perform offered to pay him in stocks (Brilund). To cut the long story short he
purchased those shares from them (6000) for the amount of 50 cents per share.
He then forgot completely about them. One day when he looked in the newspaper
he saw the quote of the stock was 1.90 dollar per share. He immediately sold
his holdings and made a profit of over 8000 dollars.
He immediately understood
that he was missing something great in his life and started taking active
interest in stocks. Nicolas undergone all the usual stages any newbie trader
goes through when he starts trading: seeking tips from anyone: both amateurs
and professionals, subscribing to various financial newsletters, asking advice
from his brokers, buying a lot of stocks and selling them fast. These things
made him lose half of his (Brilund) profits.
Darvas decided to become a
fundamentalist and started looking at company’s ratings, share price, price
earnings ratio, earnings per share, dividends and etc. He would try to find the
best industry and the best stock in the industry. At some point he thought he
got it and selected the best industry with the best stock in that just to find
out how wrong he was. He pledged his property in order to buy the stock. This
operation caused him to lose 9000 dollars.
He was desperate to lose his
property in Las Vegas and desperately started searching for a stock that could
save him. He noticed one that was climbing (Texas gulf) at the time and decided
to put all his money in it just because the stock was rising. He recouped half
of his losses and got out of the stock.
All fundamental stuff did not help him, but
caused only losses. On the other hand not knowing anything about the stock but jumping
into it because it was rising made him money. He said:”The stock that saved me
from disaster was one about which I knew nothing. I picked it for one reason
only— it seemed to be rising.“
Darvas decided not to base
his trading on luck anymore. He decided to repeat the process that he did with
(Texas gulf) and he succeeded again. He found a stock that was rising “m
& m wood working“ and bought it. He made some nice cash. He could not find
much information about it, but it worked again.
criteria for selecting stocks
If an inactive stock would suddenly
begin to rise (with nice volume) that meant something and he should get ready
to jump into the stock.
How to judge a movement at the time it
happens? Is it right time for entering market or it is time to stay away, or
maybe close a position? He went on to study patterns of stock fluctuations and
see if there are some tendencies. He says that: „Stocks did not fly like balloons in any direction. As if attracted by a
magnet, they had a defined upward or downward trend, which, once established,
tended to continue. Within this trend stocks moved in a series of frames, or
what I began to call "boxes" They would oscillate fairly consistently
between a low and a high point. The area, which enclosed this up-and-down
movement, represented the box or frame.“
He expected the stock to bounce between
the upper and lower part of the box (range). If it didn‘t he would leave the
stock alone. He wanted the stock to be alive. If it wasn‘t, even if it broke
out it would probably not be able to move dramatically.
The stock could stay in the box (let‘s
say 30-35) for a long time. As long as it did not move below that level Nicolas
was fine with that. If it, however, did move below he would stop watching the
stock. For him, it meant there was something wrong with the stock and the trend
of it was down. He wanted only those stocks that had potential to go up.
So, if the stocked bumped between 30-35
he would continue watching. If, however, it started going above 35 he would buy
the stock. We know it as a breakout trade. He started using a breakout trading
strategy. When a stock went above the price box he would buy it.
stop loss theory
He saw that his theory did not work 100
percent and the natural thing that he did was to limit risks. So, if he bought
a stock climbing to another „higher box“ (let‘s say from 30-35 to 36-40) at 36
and suddenly the stock would start falling back into previous box of 35-30, he
would sell it at 1 point loss (his stop being at 35). This is how he limited
losses. If stock acted right (climbed bit by bit higher (with some
fluctuations) he would let his profits increase.
At this point he developed this formula
for trading his strategy:
1. Right stocks
2. Right timing
3. Small losses
4. Big profits
It was interesting that
Nicolas Darvas was trading at the time online trading was non-existent. Once he
shaped his trading strategy he set up a two year tour around the world with his
dancing act. He was afraid that it would limit his possibilities to trade in
stocks. However, on the contrary It turned out to be an advantage rather than
disadvantage. He would not need to check his stocks every fifteen minutes, but
concentrate on those that were active and moving. His broker would regularly
send him telegraphs and he would also get Barton’s magazine with quotes of
Techno fundamental theory
Nicolas Darvas made another
fundamental discovery. Although, his fundamental analysis did not really work
he noticed during a major bear market some stocks tend to resist downward trend
than others. He found out that these were stocks that had good earning trends.
Seeing that he made a conclusion that:”stocks
are slaves of earning power”. Therefore, in terms of fundamental analysis he
decided to follow only earning results of companies he was interested in. He blended his technical approach to the
market with this specific fundamental aspect and got tremendous results in
The same approach works
today. You just analyze stocks and what happens with them when they reach
important support levels and quarterly earnings reports are released. Select
the best companies wait for them to reach support and wait for earning season
to come. Just these two things will make you a profitable trader.
The same thing can be
applied to trading currencies. From fundamental point of view you will be
looking at interest rates releases (not earnings) and the same
support/resistance issues. It does not mean you will never fail. It means you
will have much bigger profits than losses trading this way.
This kind of trading made
Darvas to make over 2 million dollars in stocks. He did it by trend trading. Here
is a chart of his most successful operation at the time.
If you want to make extra money and
are ready to trade Forex, futures, indexes and stocks I recommend Etoro.
Travelling around the world
and using his techno fundamental approach Nicolas Darvas was able to make
around two million dollars of profits. However, like any other trader he had
his own weaknesses and this was revealed when he came back after the tour
around the world and got closer to Wall Street. There he was surrounded by
rumors, tipsters, news, opinions, brokers and other losers. In this type of
crowd he could not but give in to crowd mentality and abandoned his trading
rules by trying to go with the crowd. In a matter of two weeks he lost around
100 thousand dollars.
It is good lesson for us
too. We should stop listening to tips and develop our own trading style and
system. Then we should follow it faithfully. You can never follow a crowd and
expect to make money in the markets. The crowd is almost always wrong.
If you liked the post I
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platforms. Have a nice day.
financial markets carries a high level of risk, and may not be suitable for all
investors. All information on the blog http://trend0.blogspot.com/ is of educational
nature and cannot be considered as advice, recommendation or signals to trade
in any financial markets.