Why we need to learn about the Darvas Box theory?
1. In order to ride and not miss major/monstrous rallies
2. It will bring discipline to our trading system
3. Will bring as consistency in order to survive in very volatile market
4. Help us to manage risks where we can learn placing stop loss and trailing stops
5. Participate in trending markets.
How to plot the Darvas Box?
According to Nicholas Darvas, there are certain criteria that needed to fulfill first before we able to construct Darvas Box. These are the following criteria.
1. Price must be in 52 week high or in All time high
2. There is should be spike in volume because it will determine the first box form
3. The cryptocurrency or a certain stock should be in uptrend.
4. The top of box will be form when the price reached its peak or the resistance of the box and when it did not touche or exceeded for 3 days. (I will give a sample chart below)
5. The bottom of the will be form when the price reached its support or when it did not go below more for 3 days.
Example of plotting darvas boxes
As you can see there are 5 darvas boxes in the chart
How did I plot this box? This chart is Litecoin way back April 2017 when it reached its all time high
Always remember the criteria that I gave above.
Observe the chart very carefully.
1. The price is in 52 weeks high ✓
2. There should be a volume spike ✓
3. The trend must be uptrend ✓
4. The top of the box will determined if the next 3 candlesticks will not beat the current top ✓
5. The bottom of the box will determined if the next 3 candlesticks will not beat the current bottom ✓
Notice the top and bottom of the box. In darvas Theory, the top of the box will only determined if the price will not beat the next 3 candles. The bottom of the box will only determined when the price did not go below with the next 3 candles.
The breakout of the top box indicating buying signal while the breakdown of the bottom of the box indicating the cut loss or the invalidation level.
As you can see that the price manages to breakout to the current resistance which is the top of the box. If there is a breakout then expect that there is a new darvas box that will form. This is the new darvas box. Again remember the criteria and how to construct the darvas box
Buy only when the price managed to breakout the top of the box. But when the price managed to breakdown to its bottom, sell it immediately to protect your capital.
And it is how you plot and manage to construct Darvas Boxes. The process is only confusing at the first but through practice and backtesting you can manage to apply the theory of Nicholas Darvas created. Like I said before, this strategy will improve your skills and will help you to have consistent earning in the market. Happy Trading to all of you
