The Dancer Who Became a Millionaire Trader
Nicolas Darvas was a Hungarian refugee after World War II, and subsequently became a famous dancer. He pioneered a trading approach for stocks that turned only $10,000 into $2,000,000 in around 18 months during a bear market in the late 1950s. As well as making him a millionaire, he became a best selling author when he wrote about his trading approach, which uses what is now called Darvas boxes.
How did Nicolas Darvas achieve this back in 1959? What can we learn from his story? This article explores his approach and some of his trading insights.
Although Darvas studied economics, he was not immediately successful as a trader. In his book “How I made $2,000,000 in the Stock Market” he writes:
I was the perfect pattern of the optimistic, clueless small operator who plunges repeatedly in and out of the market. I bought stock in companies whose names I could not pronounce. What they did and where they came from, I had no idea. Someone told someone who told me.
If Darvas started off ignorant, he made sure he didn’t stay that way. He read a number of books and immersed himself in the market. Often traders expect to be able to make money without any effort, but trading is a profession like any other. A top lawyer does not just walk into the court unprepared and expect to win his case.
Darvas quickly found that listening to tips, advisory services and broker advice was often not profitable. One of his key realisations was that he should focus on his own research. This is wise advice for traders. The world is awash with data, but you need your own insightful information. That is not obtained by listening to tips, reading commentary in the newspaper or even looking at trades from insiders. Instead, Darvas found that his own technical analysis gave him the clues he needed.
He developed the Darvas box approach after looking at hundreds of stock charts. This works by identifying boxes, which enclosed a high and low point. Prices tended to bounce within this box, but when they moved out of the box, this denoted a change. A change could drive a buy or sell action.
Nicolas Darvas realised that overtrading would eat away his trading capital in commissions. He needed to ensure that his system had larger average profits than losses. One way he arranged this was to raise his stop loss with the market and sell at a profit when his boxes started to move down.
He rounded out his system by combining fundamental analysis. Darvas identified stocks that would have improved earnings. He understood that certain industry sectors and stocks would tend to outperform others. He focussed his efforts with his technical analysis on these stocks.
Nicolas Darvas was no stranger to the errors of mindset that afflict traders. After making over $500,000 in the market, he ran into a time of losses. He writes:
A detailed list of my trading at this time reads like a lunatic’s chronicle. I can still hardly believe it. Now I know it was caused by egotism leading to vanity leading to over-confidence, which in turn lead to disaster. It was not the market that beat me. It was my own unreasoning instincts and uncontrolled emotions.
Pages: 1 2
Tags: Darvas box, Nicolas Darvas, Trader biography