One of the greatest investment books ever published was written by a professional dancer. The 1960 book, How I Made $2,000,000 in the Stock Market, was written by Nicolas Darvas. Other than his books, little is known about Darvas. His Wikipedia page provides a brief biography of his early years:
Hungarian by birth, Darvas trained as an economist at the University of Budapest. Reluctant to remain in Hungary until either the Nazis or the Soviet Union took over, he fled in June 1943 at the age of 23 with a forged exit visa and fifty pounds sterling to Istanbul, Turkey. Sometime later, he met up with his half-sister Julia. who became his partner in a dancing team in Europe and the United States.
We know that, “In April 1953 the two appeared with Judy Garland and Bob Hope. By 1956, they were touring.”
In his book, Darvas tells how the dance team he formed with his sister was the highest paid dance team in show business at the time. They toured the world and performed in front of sold out audiences. And, all the while he was trading stocks using the best technology he had available, telegrams and Barron’s. Over a three year world tour, he claimed that he turned a $36,000 investment into more than $2,250,000.
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The Path to $2 Million in Profits Started With Books
Darvas studied the stock market and read an estimated 200 books. He later wrote that two of the best books he’d read were The Battle for Investment Survival by Gerald Loeb, and Tape Reading and Market Tactics by Humphrey Neill.
He put his knowledge to work in the Canadian stock markets and his first trade resulted in a 200% gain. But, he lost his profits and much of his original savings in a bear market and moved his small account to the New York Stock Exchange.
In his book, Darvas described his strategy as the techno-fundamental theory of investing. He used a unique fundamental approach to find potential trades and then applied technical analysis to determine when to buy and sell.
Fundamental analysis was limited to an industry level analysis. Darvas created a list of industries he expected to do well over the next 20 years. This was the late 1950s. His list included the electronics industry and companies that were involved in making missiles. He was sure these industries would grow.
This may seem like a superficial analysis but remember that Darvas was a student of market history. He wrote how simply spotting important industries would have allowed an investor to enjoy large profits in previous bull markets.
He cited railroad stocks in the late 1800s as the most profitable industry for traders and Wall Street history tells of many great fortunes made in railroad companies. In the early 1900s, automobiles were replacing railroads on the nation’s transportation systems and on Wall Street.
Although we don’t think of these industries in that way now, at the time they were the emerging tech companies of their day and they delivered large gains to their investors. Darvas’ approach to fundamentals may seem superficial but it is actually a cornerstone for profitable trading.
The Technical Rules of Techno-Fundamental Analysis
The starting point was the fundamental analysis. Darvas then obtained a list of stocks in the industry he was interested in and studied their charts to develop his strategy. He then watched for increases in volume in the stocks on his watch list. He used weekly data from Barron’s for this step in his process.
When he spotted above average volume in a stock on his watch list, he sent a telegram to his broker asking for daily quotes on the stock. He’d then follow the price action, looking for a break out.
“Darvas applies a filter – a Darvas box (DB) – to price movements to help determine which price moves are significant, and which are not. The filter is established by upper and lower limits of a Darvas box.
The top of the Darvas box always starts with a new high. This high must be followed by 3 days that are lower. The bottom of the Darvas box can only be calculated after the top of the Darvas box has been confirmed.
It is constructed in the opposite way to the top of the box. It uses as its starting point the lowest low that occurs AFTER the top of the Darvas box is established. It is again a 4-day pattern, but it starts 1 day after the top of the box pattern.
This means it takes a minimum of 5 days for a Darvas box to be identified for both top and bottom.”
In other words, he was looking to buy breakouts from a trading range. After spotting the range, he would send a telegram to his broker with a buy order just above the top of the trading range and a stop loss order just below the bottom of the range.
Once he was in a trade, he used a trailing stop for his exit strategy. He noted that boxes “piled up” and new boxes formed as the up trend developed. Each time a new box pattern was formed, he would raise his stop.
Boxes in Action
The next chart shows the boxes in action. Notice that they work exactly as Darvas described.
Boxes pile up and signal exactly when to buy and sell. This is a trading strategy few traders have heard of but it is one that works.
To implement the strategy, you could simply use an index, employing only the technical portion of the strategy as we showed in the chart. Or, you could create a list of stocks in a top sector, perhaps the biotech sector or social media companies.
The advantage of using companies is that the gains are likely to be larger than those obtained with an index. However, either approach can be applied profitably by traders who take the time to learn the secrets of Nicolas Darvas, the dancer turned trader.