Lessons from "How I made $200000 in stock market"
Nicolas Darvas was a dancer who made a small fortune in the market during the roaring bull market of 1957 to 1958. He made 2.45 million in 18 month using a simple strategy. He wrote the famous book " How I made $200000 in stock market" detailing his strategy.
The next criteria Darvas used to reduce the universe was sector. He was interested in what he called "infant industry". His logic was a stock making all time high in a static or dying industry was not worth his time and effort as it is unlikely to make a big subsequent move. He was interested in a young sector with potential for substantial growth.
Applying all his criteria would leave him with a dozen or so stocks to focus on. Nicolas Darvas was basically playing a probability stacking game. Each of his criteria increased the probability of finding a big mover. Combined all those probabilities and you have a very high probability stock with potential to make big move.
- Double from 52 week low
- All time high
- Infant sector
- Current earnings growth or expected growth
- Low capitalization
- High volume surge
- Box or range near recent high
Once he identified a stock like that he would wait for it to form what he called a "Darvas box". Darvas Box was nothing but a sideways consolidation of few days to weeks or months on such stocks. He would buy the stock when it broke out of that consolidation on high volume. He would use a limit buy order to enter above the consolidation. Once in the stocks he put his stops near the box high. His logic was that if the high volume breakout out of the box indicates start of new up leg then the stock should not go back in to the box.. If that happened it was a mistake to buy the stock. He was willing to get stopped out several times with small loss.
Once the stock started going up he would put his stop near the new box low and keep raising it as the stock moved from one consolidation area to another. He would also keep pyramiding in to stock along its up move. He aggressively used margin. At some stage the stock would reverse and take out the box low and he would be stopped out of his open position.
Dravas called his method "Darvas Method in Rising Market". He traded it only in bull market. He sat out bear markets. It is a good method for working people or people who can not watch market in real time.
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