Darvas Trading

DARVAS TRADING By Daryl Guppy Strong trending markets set up the conditions for Darvas trend trading. This is an extension of the recent articles on trading 21 day highs. Classic Darvas is a trend following method based on defining the volatility range of prices over a selected period. The trend is defined by using a series of volatility boxes. APPLICATION

The classic application uses the intraday price as the trigger point for a stop loss exit. This is a stand alone trend trading technique. It is best applied to stocks that are making new 12 month highs. The Darvas box defines the stop loss conditions and the trend continuation conditions. The classic application closes the box where there is an intraday move above or below the box parameters. Darvas boxes can also be applied to any established trend, even though new annual highs have not been created. Stocks should be checked for previous compatibility with this method. It cannot be applied to short side trading. The user selects the high to be used as the potential starting point for the Darvas box. The GTE Darvas tool will automatically plot lower and upper box lines. When a breakout from the box occurs, the box will be automatically closed. The user can also apply a ghost box to monitor the development of trends when no formal new Darvas box is created. This is used as a method of managing volatility and lifting the stop loss point. This is a stand alone indicator that is not combined with any other methods.

TACTICS  

Breakouts above the Darvas box confirm trend continuation. Traders can buy breakouts. Aggressive traders buy while prices are within the confines of the box in anticipation of a breakout.

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Breakouts below the box suggest trend collapse. This is a stop loss signal, and an exit is taken. Ghost boxes are used to manage stop loss points while the trend continues without meeting the conditions necessary for a new Darvas box.

RULES     

Sell when price drops below the bottom of the Darvas box Sell when price drops below the bottom of the ghost box Breaks above the upper edge of the box signal trend continuation Buy bullish breakouts to new highs Construction rules are automatically applies by the GTE Darvas tool

ADVANTAGES     

Exact stop loss points Defines acceptable volatility effectively Excellent trend trading tool Easy to manage using automatic stop loss and buy orders Suitable for investment style trading

DISADVANTAGES 

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The stop loss is based on the bottom of the most recent Darvas box. In some trends, this can remain unaltered for many days as the new trend continues. This puts profits at risk. Does not suit all trends or all stocks. The GTE Darvas tool will recognise all price bar combinations that meet the Darvas conditions. The user must ensure that the Darvas box is validly based on the most recent highest high and ignore any ‘inner’ boxes.

INDICATOR REVISION TACTICAL SUMMARY NOTES

These summaries are designed to explain how various indicators are applied to trading opportunities. The notes include tactics and rules for using and applying or constructing each indicator. The notes finish with a summary of the advantages and disadvantages of each indicator. These notes describe the way we use these indicators in our trading and are designed as a short reference guide.