DARVAS TRADING

By Daryl Guppy
Strong trending markets set up the conditions for Darvas trend trading. This is an
extension of the recent articles on trading 21 day highs.
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.
APPLICATION
The classic application uses the intraday 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 classic application closes the box where there is an intraday move 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 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.
This is a stand alone indicator that is not combined with any other methods.

TACTICS
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.

RULES
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 applies 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
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.
INDICATOR REVISION
TACTICAL SUMMARY NOTES
These summaries are designed to explain how various indicators are applied to trading
opportunities. The notes include tactics and rules for using and applying or constructing each indicator.
The notes finish with a summary of the advantages and disadvantages of each indicator. These notes
describe the way we use these indicators in our trading and are designed as a short reference guide.