Darvas gummy Boxes
motivated by e-mail from Richard C.

Okay, so there's these things called Darvas Boxes and ...

>And you never heard of them before, right?
Pay attention.
It seems this ballroom dancer Nicolas Darvas, turned $X into $Y by identifying particular stocks (in some magic way), then buying and selling after they had traded in a narrow range ... expecting them to break ouf of a trading box either UP (so he'd Buy) or DOWN (so he'd Sell) and ...

>Huh? $X and $Y?
Depending upon who you read, $10K < $X < $36K and $2M < $Y < $2.5M.

>Identifying stocks in what magic way?
I have no idea. I'm only interested is seeing whether trading in a narrow range signals some major UP or DOWN movement.


Anyway, I got this spreadsheet that'll download a year's worth of daily stock prices and look for "narrow trading ranges".
It looks like this (where you can click on the picture to download the spreadsheet):

To find them thar "narrow trading ranges" this is what I did:
  1. I look at the price on some day N (over the past year).
  2. I see if that price (at day N) is the Maximum over (N-10, N+20).
  3. If not, I move on to the next day and repeat 1 and 2
  4. If it is the Maximum, then I draw the upper edge of a box, from day N to day N+20.
  5. Then I find the Minimum over (N, N+20) and draw the lower edge of the box.
  6. Then I continue the chart for another 10 days or so ... to see what happens after the "narrow range".
  7. Then I see whether it breaks out UP or DOWN and ...

>What's "narrow"?
Oh ... I forgot. I calculate the height of the box as a percentage of the Maximum: (Max - Min) / Max.
That's the Darvas Range and measures how "narrow" the box. For example: (16.10 - 15.19) / 16.10 = 0.06 or 6%.

>Why 20 days? Why not 30 or 47 or ...?
I reckon a month is good and that's about 20 market days.
Anyway, the spreadsheet identifies all boxes over the past year so you can see what happens next ... whether there's a breakout and whether it's UP or DOWN.
>And how long you have to wait.
And whether it's a good scheme in bear markets.
>And whether Darvas knew what he was doing.
And whether you should adopt Darvas Boxes as your trading strategy.
>And whether you should split your winnings with me.

When Time magazine told the Darvas story in May, 1959, the DOW was on a roll.

>I assume he wrote a book.
Don't they always? Darvas wrote one in 1986.      

I was thinking of writing one myself ...

CLICK!


One of Darvas' investments:
up 400% in less than 3 years
>That Lorillard looks pretty good, eh? Darvas was a genius in finding that stock!
Financial genius is a rising stock market.
John Kenneth Galbraith

Stare intently at the Lorillard chart, then look at this guy:

up 800% in one year


>Nice! Too bad you didn't own it!
Aaah, but I did own it ... and finding it was (are you ready for this?)
PURE LUCK!

>Okay, but if I wanted to see if prices break out of "narrow ranges", I'd want to see ALL the boxes for a bunch of stocks and ...
Hmmm ... good idea, so there's this spreadsheet:

You type in a gaggle of stocks then click the NextSTOCK button.

>So that's Darvas Boxes, eh?
Darvas? No, his system is more complex. What we're talking about is trading in a "narrow range" and prices inside a box.
That's what I find interesting so I just looked for these ...

>Then we've been talking about gummy boxes!
Uh ... yes, I guess so.
In gummy boxes, we've used the closing price each day. Darvas uses the actual daily Highs and Lows.
In gummy boxes, we've considered 20 market days ... about a month of market cativity.
Darvas looked at just a few days. His techniques may have been more like this:
  1. His Top is established if the High was the maximum over the period from 3 days earlier to 3 days later: [N-3, N+3]  
    That'd make Top a local maximum.
  2. Then he established a Bottom for the box.
    He looked for the Low over the next few days.
  3. Then he set a BUY order just above the Top (expecting that the price would continue UP).
    He also set a SELL order just below the Bottom (expecting that the price would continue DOWN).

Top & Bottom of a Box

>Is there someting magical about 3 days?
Wait ... I'll ask Darvas.
Actually, he died about 30 years ago. His method is still being written and rewritten and modified and massaged.
Some have said that he made the technique purposefully vague in his book.

>I take it you don't really understand Darvas Boxes. Am I right?
Well ... yes. However, I do know that Darvas looked at actual daily Highs and Lows, not Closing prices.
He also looked for local Maxima over just a few days, not weeks.
SO, if'n you'd like to play with something more like the real McCoy, try this spreadsheet:

Note that the Tops of these "boxes" are at a local Maximum and the Bottoms at a Minimum.
They are *not* (except by accident) at a Closing price.