Nicholas Darvas was a trader from the 1960s. It was rumored that he had made it from a dishwasher to a millionaire with his trading method. So the pure American dream. Let us not be blinded by it. The stock exchange of the 1960s is not comparable to today's. Old school traders would have a much harder time surviving today. Nevertheless, we can look at the method and develop our own strategy that corresponds to today's markets.
What are the Darvas boxes? Basically, the boxes are about course phases, which are marked with a box and defined according to certain rules. Then breakouts from the phases or the boxes are traded.
The rules for the boxes
According to the rules of Darvas, a box consists of an upper and a lower limit. These are set starting with a new high that was made from the price within a period (depending on how the term is selected and which chart is analyzed). The definition of the box therefore depends on how the course behaves when the new one has already been established. Only then is the course phase considered valid.
If a new high is formed, the three subsequent highs must be lower. Only then is it looked for a low that should represent the lower limit of the box. Like the high, the low must be confirmed with three higher lows. The example below shows what such a box could look like according to the defined rules.
Interpretation of the Darvas Boxes
As we have seen, the definition of a valid box is very simple, before but to adapt everything according to all rules of art. In the 1960s, the boxes were generally seen as a trend continuation pattern. As the example above shows, a break out of the box could be seen as a trend confirmation. In addition, the lower limit of the box was considered the stop loss price, i.e. the price at which the position was closed out again if the price ran against you. If you had followed these rules, the example shows that you could have taken the trend with you.
Another way of interpreting the boxes would be to understand them as turning patterns. If the box - based on our example - had broken down instead of upwards after it was recognized as valid, the upward trend would have been at least in the medium term ended. Even if that sounds relatively simple, it should not be forgotten that courses can hardly be squeezed into rigid patterns. Fake outbreaks are more common nowadays than a rarity - and if we chased every outbreak, we would be broke faster than we can watch.