DARVAS BOX

Strong trending markets set up the conditions for Darvas trend trading. 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. 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.
APPLICATION
The Darvas setup for trading stocks fails miserably on the daily scale but
works best using stocks on the weekly scale.
The classic application uses the intraday price as the trigger point
for a stop loss exit.
This is a standalone trend trading technique that is not combined with
any other methods.
It is best applied to stocks that are making new 12 month highs.
Suitable for investment style trading
Note1: 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.
Note2: 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.
RULES FOR TRADE SETUP

DARVAS BOX
1. Find a new 12-month high. The straight-line run is where this technique
works best. Stair-step rises often lead to losses using this technique,
especially if daily data is used.
2. Find the top of the box, which is the highest high for the next three days (4
days total). The top of the box is a four day pattern. On day one, price
makes a higher high, which will be the yearly high. The next three days
will have lower highs. They can be any value but they must remain below
the first day's high. They do not need to be consecutively lower highs,
where one high is below the next. Those three days can have any value
providing they remain below the high.
3. After finding the top, look for the bottom of the box. It's the lowest low for
the next three days (4 days total).
4. Once the box is complete, a close (Darvas used a new high) above the top
of the box signals a buy. Buy at the open the next day.
5. A close below the bottom of the box is the sell signal. Exit at the open the
next day and then go back to step 1.
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 applied 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

DARVAS BOX

DISADVANTAGES
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.

I tested the setup using 104 exchange traded funds and 557
stocks using data from March 12, 2001 to October 1, 2010, a
period in which the S&P 500 index closed unchanged. During that
period, however, the market experienced two bull and two bear
markets. Not all stocks or exchange traded funds covered the
entire period. Commissions were $10 each way ($20 round trip)
and no allowance for slippage or other factors was used. I
began each trade with a value of $10,000 and then averaged the
results for all trades.

DARVAS BOX
I show an example of Darvas boxes in the chart on the right.
The first peak occurs (let's assume a yearly high), when
price peaks and then makes lower highs for the next three days.
In other words, each of the three highs remain below the first
peak.
Another example of a box top is in the left inset. Price makes a
new high and then the following three days have high prices that
remain below the high set on the first day. The three days need
not have consecutively lower highs (each day's high is lower than
the prior) to qualify as the inset shows.

This same philosophy applies to bottoms and the right inset

shows this. Each low need not be a consecutively higher low
(each low is above the prior one). Rather, they can be any value
providing they remain above the bottom set by the first day.
The box bottom in September is the first one that qualifies after
the box top (remember, the top must appear first and be at a
yearly high). In the first example, the box top is at about 88 and
the bottom is at 78, for a tall box.
When price rises to a new high in October, it signals a buy, which I
show in blue. The actual purchase would be made at the market
open the next day. Since price has made a new high, the search
for a box top would begin and be found a few days later. I raised
the peak on the black box to show a new high (that is, I
lengthened the black candle on the first box top in October). Your
quotes may show a different combination of peaks and valleys. A
box bottom follows when price bottoms followed by three higher
lows. The October box top would be about 90 and the bottom
would be about 87.
Price makes a new high and forms a valid box top. Again, the
search for a box bottom begins but does not occur by the time the
chart ends. However, price has closed below the box bottom,
signaling a sale which would occur at the market open the next
day.
This example may not be a valid Darvas box because I didn't
check whether it's at a yearly high but look at the buy and sell
prices. This box loses money! Looking at the setup in several
stocks reveals that on the daily scale, the system follows this

DARVAS BOX
configuration, that of opening a trade just before price peaks,
ending in a losing trade. Perhaps this method worked for Nicholas
Darvas in the 1950s, but it doesn't today.
How bad is it? The following section answers that.

Darvas Box Results

The following table shows the test results. The top half of the
table tests exchange traded funds and the bottom half tests a
portfolio of stocks. The only parameter varied is the time required
for a new high to appear.
New
Hi
Look
Back

Hol
Avg Average d
Hol
Win/Lo
Tim S& d
Trad Syste Descripti
ss
Gai Drawdo e
P
Tim es
m
on
n
wn
Los
e
s
39.0% 0.3%

6.1% 3.8% 2.2

%

45

980

ETFs

180 d

37.0% 0.2%

6.1% 3.9% 2.5

%

44

752

ETFs

365 d

38.0% 0.1%

6.1% 3.9% 2.6

%

45

540

ETFs

47.0% 8.3%

13.7% 8.9% 1.2 271

%

327

ETFs

271

Does not
allow
ETFs
lower
stops

262

ETFs

277

Buy new
high, not
ETFs
on close
above box

91 d

26 wks

52 wks

49.0%

10.0
%

13.8% 9.0% 0.7 291

%

52 wks

10.5
49.0%
%

13.7% 8.8% 0.7 297

%

52 wks

11.1
46.0%
%

10.6
15.8%
1.8 322
%
%

Best!

DARVAS BOX
38.0% 0.1%

8.7% 6.1% 1.9

%

42

6230 Stocks

0.1%

8.6% 6.1% 2.1

%

42

4735 Stocks

365 d

35.0% 0.0%

8.2% 5.8% 2.2

%

41

Does not
allow
3378 Stocks
lower
stops

365 d

36.0% 0.0%

8.3% 5.8% 2.2

%

41

3423 Stocks

13.1
18.6%
1.7 223
%
%

2410 Stocks

91 d

180 d

52 wks

36.0%

42.0% 6.9%

I varied the time to search for a new high from 91 days (91 d) to
52 wks (weeks). The wks rows use weekly data; everything else
uses daily data. The win/loss ratio is about what trend following
setups have, with success rates in the 30s. On the daily scale, the
average gain is pathetic, especially for stocks, but for exchange
traded funds (ETFs) as well. Switching from daily to weekly
doubles the maximum average drawdown. That's an average of
all securities, each of which logs its worst drawdown per trade.
The hold time loss is how far price drops below the buy price
during the trade, averaged over all trades.
The best of the bunch is to trade ETFs on the weekly scale with a
new high period of 52 weeks (1 year). I did not try other tests (like
50 weeks, 49 weeks, and so on) other than those shown. I chose
this row because the drawdown and hold time losses are a bit less
than the row below it. The average gain is less but the win/loss
ratio is higher.
One test uses a high price above the box top to trigger a buy
instead of a close above the box top (this is what Darvas used.).
That test results in inferior results for the reasons I mentioned.
Two other tests do not allow lower stops. I mentioned above that
this occurs about 39% of the time, but allowing a lower stop
seems to improve results to a minor degree.
Since the weekly scale suggests a working system and the daily
scale does not, I question the stability of this trading

DARVAS BOX
methodology. It should work in both environments. It's possible
that my implementation is in error, so be sure to test this before
using it. Maybe you can get it to work better than I.