Methodology

The Darvas methodology combines technical and fundamental analysis for stock selection and trade execution.

Stock Selection Criteria (Technical)

• Upward Momentum: Darvas looked for stocks already in an uptrend and showing strong price movement.
• Price Action and Volume: He noted daily stock quotations, paying attention to highs, lows, and volume spikes. He used volume surges as a sign of strength.
• Darvas Boxes: A stock consolidates within a price range before its next move. The high of the previous move becomes the top of the new box.
• Breakouts to New Highs: The primary buy signal occurs when a stock breaks above the top of a Darvas Box into new all-time highs, preferably with increased volume.
• Stable Price Base: Stocks with a stable price base over several weeks before breaking out were preferred.
• Moving Averages (Modern Application): While not used by Darvas, modern traders incorporate 5-day EMA, 10-day SMA, 50-day MA, and 200-day MA as additional support and breakout indicators.

Stock Selection Criteria (Fundamental)

• Growth Stocks: Darvas targeted high-growth companies in emerging industries like electronics and rocket fuels.
• Overall Market Uptrend: The general market cycle influences most stocks. Darvas focused on bull markets.
• Alignment of Fundamentals and Price Action: Stock price action should align with earnings growth and fundamental strength.
• Techno-Fundamentalist Approach: Stocks were chosen technically, but purchases were made only if fundamental earnings growth was evident.

When Does This Strategy Work Best?

The Darvas strategy performs best in strongly trending bull markets, where stocks experience sustained upward momentum. It also thrives in rapidly expanding industries with high-growth potential.

Less Effective Conditions:

• Bear Markets: Stocks struggle to break out, and the risk of failed breakouts is higher.
• High Volatility Periods: Market turbulence may cause whipsaws and false breakouts.

Entry Strategy

Key entry points for the Darvas strategy include:

✅ Breakout to New All-Time Highs: The price moves above the upper limit of a Darvas Box, ideally with rising volume.
✅ Bounce at the Bottom of a Darvas Box: Some traders buy when the price bounces off support at the bottom of the box.
✅ Breakouts and Bounces at Moving Averages:

• Bouncing off the 50-day moving average.
• Breaking above the 50-day moving average.
• Bouncing off the 200-day moving average.
• Breaking back above the 200-day moving average after a bear market.
  ✅ Finding Support at the 5-Day EMA or 10-Day SMA: Short-term support signals in strong uptrends.
  ✅ Pilot Buy: Darvas often initiated a small “pilot buy” before committing larger capital.

Exit Strategy

Darvas had a disciplined exit strategy to protect profits and limit losses.

🚨 Breaking Below the Darvas Box: If a stock falls below the lower edge of the box, he would sell immediately.
🚨 Trailing Stop-Loss Hit: He used a trailing stop-loss that moved up with the stock price, locking in profits while letting winners run.
🚨 Initial Stop-Loss Order Hit: Every buy had an automatic stop-loss order to limit potential losses.

Risk Management

Darvas’ risk management principles were key to his success:

🔹 Always Use Stop-Loss Orders: Stop-losses were placed at the time of purchase to define risk upfront.
🔹 Trailing Stop-Loss for Profit Protection: This ensured gains were locked in while allowing stocks to run higher.
🔹 Pilot Buys for Testing Trades: Small initial positions helped confirm a stock’s trend before committing more capital.
🔹 Never Add to a Losing Trade: Darvas only added to positions showing a profit.
🔹 Emotion-Free Trading: He focused purely on price action, avoiding emotional attachment to stocks.
🔹 Liquidity Matters: He only traded listed stocks, ensuring easy exits when needed.
🔹 Spreading Trades Among Brokers: To avoid detection, Darvas sometimes used multiple brokers.

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