Stocks & Commodities V.

23:6 (16-22): Something Darvas, Something New by Daryl Guppy

CLASSIC TECHNIQUES

Modifying The Darvas Technique For Today’s Markets

Something Darvas,
Something New
In the May 2005 STOCKS & COMMODITIES,
BOX STACKING
Daryl Guppy discussed classic Darvas-style
trading. Here, he modifies the technique to fit
modern-day markets, given that markets are Modern D_Box 2
more volatile these days than they were in the
1960s.

by Daryl Guppy
Ghost D_Box Stop-loss 2
he increased volatility of mod-
ern-day trading has reduced the

T risk control elements of the

Darvas approach, which was
originally developed and ap-
plied to less volatile markets. Ghost D_Box
Ghost D_Box

Intermediate
stop-loss
Intermediate
stop-loss

The Darvas box and trailing-stop approach is

designed to keep you in a long-term steady
Modern D_Box 1 Intermediate
trend, since the stop-loss level remains unal- stop-loss
tered for extended periods in the face of sub-
stantial price moves. But in the volatile mar- F1
kets of today, this kind of strategy could ex- Stop-loss 1
pose you to an unexpectedly high level of risk.

GTE TOOLBOX
To bring this classic trading style into modern
markets, I made four modifications. Each modi-
fication is consistent with the underlying logic
FIGURE 1: BOX STACKING. Here, ghost D_Boxes are used as a volatility stop-loss solution. Note how
of the Darvas method.
the trailing stops are based on the height of the last box.

MODERN DARVAS RULES

The new rules are shown in bold:
■ Trade is initiated by a new high for the
rolling 12- or six-month period.
■ All entry decisions are based on the high of the
price series.
■ All exit decisions are based on the close of
the series.
■ Entry action is triggered by the first trade at the
trigger price.
■ Exit action is managed on the day after the
trigger close.
■ Action is triggered by the close.
■ Stop-loss calculation uses ghost boxes where
necessary to handle modern volatility.
The most significant change is using the close to initiate
trade entries and exits. Although this is only a minor change,
it does substantially increase the reliability of Darvas-style
trading in modern markets.
Since the Darvas trading approach was developed in a
market where high volatility was unusual, the original ap-
proach used the bottom of the most recent D_Box as a stop-loss
point. The stop-loss point was only raised after a new D_Box
had been formed. The stop-loss is lifted upward on a regular
basis and does not lag far behind the current price action.
In modern markets, prices often move upward very quickly
in a typical momentum-driven sharp trend. There is no threat
to the underlying trend in this action, but the speed of the
move is not adequately managed using the Darvas stop-loss
approach. To accommodate for this, I developed a “ghost”
D_Box (Figure 1).

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 23:6 (16-22): Something Darvas, Something New by Daryl Guppy
IN WITH THE NEW
The ghost box uses the height of the last D_Box, measured in
cents, to capture the current volatility of the stock. If a new
D_Box does not develop quickly, you use a stepped trailing
stop-loss based on the height of the last box.
To understand the reasoning behind using a ghost box, let’s
return to the original D_Box calculation, which essentially
establishes the three-day bullish range — the top of the box —
and the three-day bearish range — the bottom of the box.
The solution uses the most recent calculation of these
combined ranges, which is easily identified by the most recent
D_Box. The height of this D_Box is an important guide
because it captures the bullish and bearish range. This range
goes upward above the existing D_Box as prices move. This
is done by simply duplicating the box and stacking it on top of
the previous valid D_Box. This captures the permissible range
of price activity.
Each new ghost D_Box is activated by a close above the
value of the previous ghost box. It is a useful calculation point
that provides a margin of safety when changing the stop-loss
point. If we stay too close to bullish activity, we may get
shaken out of the trend trade too early.
DOWNTREND DARVAS
The classic Darvas trading technique is well suited to bull
markets. It is less suited to markets that have taken a tempo-
rary shock and that offer many downtrend reversal entry
opportunities. The downtrend breakout Darvas technique is
modified to trade in these environments. By modifying the
technique further, the approach can be applied to young bull
markets. This is not true downtrend breakout trading, but it
does help you identify strong young trends. The base modern
rules remain the same, but one is added (shown in bold).
The breakout rules are:
■ Trade is initiated by the second valid D_Box
after the initial downtrend breakout (Figure 2).
■ All entry decisions are based on the high of the
price series.
■ All exit decisions are based on the close of the
series.
■ Entry action is triggered by the first trade at the
trigger price.
■ Exit action is managed on the day after the trigger
close. Action is triggered by the close.
■ Stop-loss calculation uses ghost boxes where nec-
essary to handle modern volatility.
Since Darvas trading is based on new 12-month strength
and bullish breakouts, it is not designed to work with
downtrend breakout trading. Once you move into smaller
time frames and apply the technique to breakouts, its reliabil-
ity is reduced. So why not modify it using six-month highs as
a starting point?
By applying the Darvas technique to a downtrend breakout,
it is likely that you won’t get into the trade close to the point
Copyright (c) Technical Analysis Inc.
DARVAS TRADING MODIFICATIONS
Price Classic
New high
for the year
Mid-Trend
New high
for six months
Breakout
Second D_Box after
breakout from downtrend
FIGURE 2: DARVAS TRADING MODIFICATIONS. There is one modifi-
cation where the trade is initiated by the second valid D_box after the
initial downtrend breakout.
of the downtrend breakout. So you need to look for an entry
point where there is greater confirmation the new breakout is
likely to turn into a trend. You cannot apply the Darvas
method until the downtrend breakout has been signaled,
perhaps by a price and volume surge. Thus, you use the high
of this initial rally to set the top of the first Darvas box and
then set the bottom using the classic rules. The alert signal
does not come until prices break above the initial high of the
first box.
Figure 3, which is a chart of Singapore-listed Giant Wire-
less Technologies, Ltd., shows a successful application of
this downtrend breakout trading. As soon as the top and
bottom of the second Darvas box are confirmed, aggressive
traders use this D_Box breakout signal as an early entry into
new uptrends. This allows greater participation in the devel-
oping trend. Conservative traders prefer to wait for the
breakout signal from the second D_Box, since this increases
their confidence in the stability of the new trend. The bottom
of the second D_Box is now the stop-loss point and there is
a better probability of any price fall finding some nearby
support. This makes it easier to implement the stop-loss
strategy.
OLD AND NEW
Even though the Darvas technique can be applied in downtrend
breakout trading, it is not successful in all cases. It works very
well in uptrends that continue, and also provides a useful
stop-loss strategy—but not if the trend breaks and slips into
a prolonged sideways pattern. The Darvas approach can be
applied to trending stocks, but it does not in itself confirm the
stock will trend after the downtrend breakout.
The search for a valid Darvas box starts with a new high for
the selected period. The classic Darvas approach uses a new
12-month high. This is a good tactic for a strong and estab-
lished bull market and has a good level of reliability of around
80%. However, in modern markets, using a new high for the
Stocks & Commodities V. 23:6 (16-22): Something Darvas, Something New by Daryl Guppy

GIANT WIRELESS DAILY CHART

D_Box 7

D_Box 6
Entry signal D_Box 5
Alert signal

D_Box 4

D_Box 3

D_Box 2 D_Box 3
D_Box 1

Box confirmation entry

FIGURE 3: USING DARVAS FOR BREAKOUT TRADING. Giant Wireless (GWTRF) successfully applied modern Darvas trading to an emerging trend, earning an 80%
return in eight months.

six-month period also returned good results with an accept-
able level of reliability of around 70%, placing this technique
in the select group of very successful trend approaches.
Even though the Darvas technique
can be applied in downtrend
breakout trading, it is not successful
in all cases.
Very aggressive applications of the Darvas technique use a
new high for a three-month period. But I found this to be a less
successful application, with reliability shrinking to between
50% and 60%. In strong bear markets, the failure rate is much
higher, since there are generally many more false downtrend
breakouts in bearish conditions. The technique can be used to
capture early downtrend breakouts and developing trends, but
there are many other more effective techniques for trading in
these conditions.
Daryl Guppy is active in Australian, Asian, and Chinese
markets, and provides certified professional training for
brokerages. He is the author of seven books and publishes a
weekly newsletter that applies technical charting analysis to
these markets. He also runs trading workshops in Australia,
Asia, China, and the US. He may be contacted via his website
at www.guppytraders.com.
RELATED READING
Darvas, Nicholas [1960]. How I Made Two Million Dollars
In The Stock Market, American Research Council.
Ford, Matthew. MetaStock formulas, Tutorials In Applied
Technical Analysis, Guppytraders.com.
Guppy, Daryl [2005]. “Darvas-Style Trading,” Technical
Analysis of STOCKS & COMMODITIES, Volume 23: May.
_____ [2004]. Trend Trading, John Wiley & Sons.
_____ [2003]. Better Stock Trading, John Wiley & Sons.
• www.guppytraders.com
See our Traders’ Tips section for program code implementing
Daryl Guppy’s technique. For code found in this article, see our
Subscriber Area of www.Traders.com. Login requires your sub-
scriber number.
S&C

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 23:6 (16-22): Something Darvas, Something New by Daryl Guppy

Bullish Bullish Bearish

AUSTRALIAN PHARMACEUTICALS Sell

Sell

D_Box with only 4 bars Buy

Buy

METASTOCK
SIDEBAR FIGURE 1: METASTOCK EXPERT ADVISOR FOR MODIFIED DARVAS TECHNIQUE

METASTOCK FORMULAS FOR DARVAS TECHNIQUE

A MetaStock expert advisor developed by technician Mat- Name of Indicator: Darvas Box End
thew Ford implementing the modified Darvas technique was Formula:
originally published in my weekly newsletter, Tutorials In end:=BarsSince(Fml(“New Darvas High”)) <
Applied Technical Analysis. These free formulas can be BarsSince(Ref(Fml(“New Darvas Low”),-1));
def:=IsDefined(end) AND IsUndefined(Ref(end,-1));
downloaded from www.guppytraders.com under the Trend
(def AND Ref(def,-1)=0)+ (end AND Fml(“New Darvas Low”))
Trading Formula button.
Name of Indicator: Darvas Box High
Name of Indicator: Darvas High Formula:
Formula: dbe:=Fml(“Darvas Box End”);
Periods:=100; { this is the only place the number of periods is dbhi:=If(dbe AND IsDefined(Ref(dbe,-1)), Fml(“Darvas High”),
set} PREVIOUS);
If((Ref(H,-3) >= Ref(HHV(H,Periods),-4)) If(dbhi=0,H+0.0000001,dbhi)
AND Ref(H,-3) > Ref(H,-2)
AND Ref(H,-3) > Ref(H,-1) Name of Indicator: Darvas Box Low
AND Ref(H,-3) > H, Formula:
Ref(H,-3), PREVIOUS ); dbe:=Fml(“Darvas Box End”);
bl:=If(dbe AND IsDefined(Ref(dbe,-1)), Fml(“Darvas Low”),
Name of Indicator: New Darvas High PREVIOUS);
Formula: If(bl=0,L-0.0000001,bl)
dh:= Fml(“Darvas High”);
def:=IsDefined(dh) AND IsDefined(Ref(dh,-2)); Name of Indicator: Darvas Poss Sell
(def AND Ref(def,-1)=0) + (dh AND Ref(dh,-1)<>dh); Formula:
dsl:=L < Fml(“Darvas Box Low”);
Name of Indicator: New Darvas Low def:=IsDefined(dsl) AND IsDefined(Ref(dsl,-1));
Formula: (def AND Ref(def,-1)=0)+(dsl AND (Ref(dsl,-1)<dsl))
dh:= Fml(“Darvas High”);
ndl:=(Ref(L,-3) < Ref(L,-2) AND Ref(L,-3) < Ref(L,-1) Name of Indicator: Darvas Sell
AND Ref(L,-3) < L AND Ref(H,-2) < dh Formula:
AND Ref(H,-1) < dh AND H < dh); sell:=BarsSince(Fml(“Darvas Box End”)) <
def:=IsDefined(dh) AND IsDefined(Ref(dh,-1)); BarsSince(Fml(“Darvas Poss Sell”));
(def AND Ref(def,-1)=0)+ (ndl AND (Ref(ndl,-1) < 1)) def:=IsDefined(sell) AND IsDefined(Ref(sell,-1));
((def AND Ref(def,-1)=0) + (sell = 0 AND Ref(sell,-1)=1))
Name of Indicator: Darvas Low
Formula: Name of Indicator: Darvas Buy
If( Fml(“New Darvas Low”) , Ref(L,-3), PREVIOUS); Formula:

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 23:6 (16-22): Something Darvas, Something New by Daryl Guppy
dc:= Fml(“darvas sell”);
{ change the following line to H>Fml(“Darvas Box Hi”) .. for
Classic Darvas}
db:= C>Fml(“Darvas Box Hi”) AND
(BarsSince(Fml(“darvas box end”)) < BarsSince(Fml(“darvas
sell”)));
dto:=If(db AND PREVIOUS=0,1,If(dc,0,PREVIOUS));
dto AND (Ref(dto,-1) =0)
Using these formulas, you can create a new MetaStock
Expert Advisor for the Darvas technique:
Trends tab
Bullish C >= Fml(“Darvas Box Low”);
Bearish C < Fml(“Darvas Box Low”);
Symbols tab
Buy: up arrow graphic, formula Fml(“Darvas Buy”)
Copyright (c) Technical Analysis Inc.
Sell: down arrow graphic, formula Fml(“Darvas Sell”)
Alerts tab
Buy: formula Fml(“Darvas Buy”) and some suitable text message
such as “buy on next open”
Sell: formula Fml(“Darvas Sell”) and some suitable text message
such as “sell on next open”
Sidebar Figure 1 on page 4 demonstrates the Darvas
MetaStock Expert Advisor using the modern modification of
only buying on a close above the box. Darvas Box High (the
upper thin line) and Darvas Box Low (lower thin line) have
been added to this chart. Remember, these indicators only
move up after a valid Darvas box has been formed. The
actual Darvas box is drawn to the left, by hand, as shown by
the thick black box.—DG