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How The Darvas Boxes Theory Works

The Darvas Boxes Theory Success Story (part 21)

When I was coming up with darvas boxes, I examined the stock's previous movements and discovered that I had bought it at the top of an 18-point rise. This was as much as the stock could contain for the time being. Almost at the very point that I put money in it, it started to drift downward. It was evident that I had bought the right stock at the wrong time.

Looking back I could see this very clearly. I could see exactly why the stock had performed the way it did - afterwards. The question, however, was: How to judge a movement at the time it happens?

It was a simple, straightforward problem, but it was complex in its enormity. I already knew that book systems did not help, balance sheets were useless, information was suspect and wrong. I had to come up with the darvas boxes.

Clutching at a straw, I decided to make an extensive study of individual stock movements. How do they act? What are the characteristics of their behavior? Is there any pattern in their fluctuations?

I read books, I examined stock tables and I inspected hundreds of charts. As I studied them I began to learn things about stock movements which I had not seen before. I started to realize that stock movements were not completely haphazard. Stocks did not fly like balloons in any direction. As if attracted by a magnet, they had a defined upward or downward trend which, once established, tended to continue. Within this trend stocks moved in a series of frames, or what I began to call " darvas boxes".

They would oscillate fairly consistently between a low and a high point. The area which enclosed this up-and-down movement represented the darvas boxes or frames. These darvas boxes began to exist very clearly for me.

This was the beginning of my darvas boxes theory that was to lead to a fortune.

This is how I applied my theory: When the darvas boxes of a stock in which I was interested stood, like a pyramid, on top of each other, and my stocks were in the highest darvas boxes, I started to watch them. They could bounce between the top and the bottom of the darvas boxes and I was perfectly satisfied. Once I had decided on the dimensions of the darvas boxes, the stock could do what they liked, but only within that frame. In fact, if it did not bounce up and down inside that box I was worried. No bouncing, no movement, meant it was not a lively stock.

And if it were not a lively stock I was not interested in it because that meant it would probably not rise dynamically. Take a stock which was within the 45/50 darvas boxes. It could bounce between those figures as often as it liked and I would still consider buying it. If, however, it fell to 44 & a half, I eliminated it as a possibility.

Why? Because anything below 45 meant it was falling back into one of the lower darvas boxes and this was all wrong - I wanted it only if it was moving into one of the higher darvas boxes. 

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