Daryl Guppy has developed the most
recent analysis and application of Darvas trading to modern markets,
including the modern application discussed here. A detailed
discussion is contained in 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. It is based on buying
breakouts to new highs for the year. Further modification of this
method for modern markets show how it can be used to trade new 3
month breakouts to new highs and trend breakouts.
The modern application uses the
closing price as the trigger point for a stop loss exit. This is a
stand alone trend trading technique. It is best applied to stocks
that are making new 12 month highs. The Darvas box defines the stop
loss conditions and the trend continuation conditions. The modern
application closes the box where there is close above or below the
box parameters. 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. 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
GuppyTraders Essentials 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.
This is a stand alone indicator
that is not combined with any other methods.
Breakouts above the Darvas box confirm trend
continuation. Traders can buy breakouts.
Aggressive traders buy while prices are
within the confines of the box in anticipation of a breakout.
Breakouts below the box suggest trend
collapse. This is a stop loss signal, and an exit is taken.
Ghost boxes are used to manage stop loss
points while the trend continues without meeting the conditions
necessary for a new Darvas box.
Sell when price closes below the bottom of
the Darvas box
Sell when price drops closes the bottom of
the ghost box
Breaks above the upper edge of the box signal
Buy bullish breakouts to new highs
Construction rules are automatically applies
by the GTE Darvas tool
Exact stop loss points
Defines acceptable volatility effectively
Excellent trend trading tool
Easy to manage using automatic stop loss and
Suitable for investment style trading
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.
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