How to Trade Like Nicolas Darvas

Who is Nicolas Darvas?

Who is this guy that even William J. O’ Neil founder of  ‘Investor’s Business Daily’ says his book is recommended reading for anyone wanting to learn to trade stocks?

Darvas first became interested in the stock market in 1952 when he received some mining stock in exchange for performing in a Toronto nightclub. The stock took off, with Darvas selling near the top. He learned a valuable lesson when the stock subsequently crashed.

Davas realized that knowledge and experience were the keys to success. He read more than 200 books about successful speculators and about the market. At one time he studied for some eight hours per day. When he was at his peak, he read Tape Reading and Market Tactics by Humphrey Neill, and the classic The Battle for Investment Survival by Gerald Loeb, almost every week.

Between 1956 and 1958 Darvas turned $25,000 into $2.25 million. He would scan newspapers for a few minutes late at night or early in the morning and select the stocks that met his requirements.

As he travelled as part of a famous dance team he would obtain a copy of the Wall Street Journal and Barrons from the local United States Embassy. He ignored everything he read and focused only on the stock prices.

Darvas was a true market wizard, often stating that it was not so much his trading profits which pleased him, but rather the peace of mind he achieved by following the system he developed which best fitted his personality.

The inevitable cynics at the time stated that Darvis was simply lucky, making his money in a very strong bull market. It is true that the market was very strong, however Darvas’ method has been shown to be effective in all market conditions. Strong bull markets can, of course, produce faster profits.

Darvas was one of the first trend followers/momentum traders to attempt to specifically quantify and share what he did to make his fortune.

Nicolas Darvas learned the hard way what not to do:

  • He lost  money following advisory services, they knew no more than he did about a stocks direction.
  • He was cautious with brokers’ advice. They were wrong more times than right.
  • He ignored many wall street sayings, no matter how ancient and revered. (Example: You can’t go broke taking a profit)
  • He learned not to trade “over the counter” or “penny stocks”-only in listed stocks where there was always a buyer when he wanted to sell.
  • He learned not to listen to rumors, no matter how founded they may appear.
  • The technical approach worked better for him than gambling. He studied price movements.
  • He would rather hold on to one rising stock for a longer period than juggle with a dozen stocks for a short period at a time.

The Darvas System:

  • Buy only the strongest stocks in the stock market.
  • Buy them as they break out of consolidated price “boxes”
  • Sell at a small loss if they fall back into the previous price box.
  • When he was right he made big profits by letting the winner run until it fell back into the previous price box.
  • He liked buying at an all time high price with increasing volume in an overall up trending market.
  • He believed stock prices bounced around in boxes with support and resistance, a buy signal or short signal was when one of these were broken.
  • He put in automatic buy orders to purchase stocks that made new highs at the break out.
  • He put in stop loss sell orders to sell a stock that fell back through the break out.

Here is a list of all the books published by Nicolas Darvas, there are several that many do not even know exist: The Full List

The book is out of copyright and here is a link to a PDF File> How I made $2,000,000 in the Stock Market

I believe I should also cover the much talked about accusations of fraud that were leveled against Nicolas Darvas which say he only made $216,000 instead of $2 million. I do not believe the accusations due to Darvas carefully documenting every trade, he showed his accounts and telegrams to “Time” magazine before they did the article “Pas de Dogh” For him to be a fraud that means that both a major magazine and publisher did zero due diligence for publication.  Darvas explains that he used many different brokers to hide his activities from other traders, and could not locate all his account records when the investigation was conducted. He also had a taste for a lavish lifestyle and likely spent much of the money. Darvas called the charges false, a “cynically irresponsible action, book burning by publicity.” Whatever you believe, his system works! I used the principles to build accounts up to $250,000 from 2003-2008 and go to cash avoiding the financial panic of 2008.