Darvas Box Theory

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Definition of 'Darvas Box Theory'

The Darvas Box Theory is a trading strategy that was developed in 1956 by former ballroom dancer Nicolas Darvas. His trading technique was particularly simple and involved buying into stocks that were trading at new 52-week highs with high volumes that matched.

A signal is generated when the price of a stock rises above the previous 52-week high and then falls back to a price just below that high. If the price falls too much, it can be a signal of a false breakout. If it does not then the lower price is used as the bottom of the box and the high as the top.

History states that Nicolas Darvas made $2 million over an 18-month time span during 1956 while at the same time traveling around the country dancing. He started his investment "spree" with $10,000. They say that he would obtain copies of The Wall Street Journal and Barron's and would examine the stock prices only to make his decisions. Reports have stated that Darvas was more excited and satisfied about the success of his system than the money that he made from it.

Market analysts who have studies Darvas Box Theory attribute part of his success to the fact that he was trading in a very bullish market. It has been stated that the same type of results can be achieved by inverting the technique in a bear market. In a sideways market it is believed that this technique is unlikely to be successful.

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