Modern Day Darvas Methods

One of my favorite trading books is the all-time classic, “How I made 2MM in the Stock Market” by Nicolas Darvas. The book outlines how Darvas became a successful trader by overcoming his own mistakes through his ‘box theory’. Having gone through several different methods without finding any consistency in profitability, he ultimately became a chartist and a millionaire – imagine that! 😉

I’ve read this book probably 10 times over the years. One thing which stands out to me is that he found success by avoiding getting spooked out of good trades, which would have happened to him had he watched the tape too closely. Darvas’ inability to keep close tabs on the market at all times allowed him to let his trades fully develop, preventing him from micromanaging his positions. If you’re like me, you might stand to benefit from such an approach.

While traveling the world by way of his profession as a dancer, he received his weekly copy of Barron’s, and reviewed his stocks of interest through these quotes which were delayed by days. After reviewing the prices and locating his favorite chart pattern, he would wire detailed trade instructions to his broker. Although today’s markets move faster than they did back then, at the end of the day he was simply focused on the price action and how his stocks were moving – just as we all should be. This means he was not being distracted by the extra “noise” of every tick, geopolitical news, rumors or sentiment.

A member at TheStockBandit.com brought this up in the discussion forums not long ago, stating that since he works all day and can’t micromanage his trades, he has let them develop more fully without overreacting to every little blip that comes along. Many of us fight the urge to react to every tick, and with dirt-cheap commissions and sophisticated trading platforms, we can micromanage trades quite regularly if we allow ourselves to! I found myself in a doctor’s waiting room the other day checking quotes on my PDA, even though I knew my safety nets (stop loss orders) were in place. I think it’s a good idea to stay connected to the market (even Darvas did that via his Barrons), so long as we just don’t succumb to the urge of taking action when no action is really needed.

Here are a few ways a modern-day Darvas might prevent micromanaging trades:

* Use Your Platform Tools. Set it and forget it. Whether you have sophisticated tools like bracket orders or just the basics, use the tools your broker has provided to help you structure your trades in such a way that they have the ability to play out without needing your constant supervision. This will help you to trade without emotion and allow you to fully implement your strategy for the trade from start to finish.

* Hide The Number. I’ve written about hiding the number before, and I think it can be quite beneficial, whether it’s your account balance or even just your P&L on trades. A trader friend of mine claims that hiding his P&L has made the biggest positive impact in his trading – more than any tools or indicators. It’s an interesting concept, particularly if you find yourself overreacting to every little pullback or advance. By giving his broker trade instructions ahead of time, Darvas didn’t watch his P&L or spook himself out of trades.

* Turn off the news flow. Darvas found that his absence from the Street allowed him to stay in trades longer so that he could let his original game plan play out. That means he was not surrounding himself with rumors or opinions or the news flow. He didn’t make bets based on gut feel – he stuck to the charts, trading from the price action when opportunies arose. If for you that means turning off CNBC, avoiding comparing opinions with your trading buddies by staying off of instant messenger or Skype, then so be it. Whatever helps you make your money is what you need to focus on. Remember, Silence is Golden!

Every one of us has some things to practice and refine in our trading. If you find yourself letting every tick influence your trading decisions too much, then take more of a Darvas approach and see what happens. You just might realize that your original game plan will serve you far better than shifting gears on the fly in an effort to control every move of your stock.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading, Darvas[/tags]