The book "How to Make $2,000,000 in the Stock Market” by Nicolas Darvas details the experiences and trading method that allowed him to accumulate substantial wealth in the stock market. Published in 1960, his insights are no less relevant today, and may help us identify critical turning points in market momentum.
Darvas was a professional dancer and self-taught investor. He developed his trading approach while traveling the world for dance performances. Darvas used a combination of technical analysis, price and volume patterns, and momentum indicators to identify stocks with strong growth potential. His trading method focused on buying stocks that exhibited a combination of price and volume breakouts.
The reason I’m introducing this to you, if you’re unaware, or reminding you, if you are, is because his method was both exceedingly effective, and exceedingly simple. But it did something more. It identified inflection points that allowed him to determine exactly when a market was worth paying attention to, and which kept him out of the market when it wasn’t.
With the strategy I’m going to propose to you shortly, one where time decay (the value of your derivative deteriorating merely because time passes) is a risk, having parameters that help identify when a stock (or commodity) is initiating a meaningful move versus messing around for half a year, is invaluable.
Darvas' specific trading strategy, as outlined in his book, revolved around a few key principles:
- Box Theory: Darvas identified specific price ranges or "boxes" within which a stock traded (in modern language these would be known as rectangle patters, or accumulation and distribution zones). He looked for stocks that broke out of these boxes with high volume and showed upward momentum. This breakout signaled a potential opportunity for him to enter a trade.
- Buy High, Sell Higher: Darvas believed in buying stocks that were already exhibiting strong price momentum. He looked for stocks that were hitting new 52-week highs or all-time highs. He believed that stocks showing consistent upward momentum had a higher probability of continuing their ascent. This will come in handy mid-way through the coming silver and uranium bulls, but I’m aiming to get you in at rock bottom prices first!
- Stop Loss Orders: Darvas placed great importance on risk management. He used stop loss orders to protect his capital in case a trade didn't work out as expected. If a stock fell below a specific predetermined price level, he would exit the trade to limit his losses. In the strategy I’ll propose shortly, we’ll manage this risk by other means, but the premise is the same.
- Focus on Price and Volume: Darvas looked for stocks with increasing volume during price breakouts, as it indicated strong investor interest and potential for further price appreciation.
- Trend Following: Darvas was a trend follower and believed in sticking with winning trades as long as the stock's upward trend continued. He would trail his stop loss orders higher to protect his profits as the stock price climbed. This is trickier to achieve with options trading, but the premise should be taken to heart.
- Patience and Discipline: Darvas practiced patience and discipline in his trading approach. He waited for clear breakout signals and avoided impulsive trades. He also emphasized the importance of staying focused and not being swayed by outside opinions or market noise.
Darvas' strategy was that of a sniper versus someone hunting with buckshot. He was able to manage this while traveling the world, and using price updates from the newspaper. It’s not a day trading strategy, but one that allows for few, but poignant selections with a higher probability of strong momentum to follow.
Of these principles, we’re going to focus on box theory (or key inflection points) and stop loss orders (or tight risk management) on our path to 100X returns in Silver and Uranium.
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