Darvas Boxes – with Bullish and Bearish Breakouts
The Darvas box theory uses market momentum theory along with technical analysis to determine when to enter and exit the market. Darvas boxes are a fairly simple indicator created by drawing a line along lows and highs to make the box.
The Darvas Boxes were taken from the pages of Nicolas Darvas’ book, How I Made $2,000,000 in the Stock Market. The boxes are used to normalize a trend. A “buy” signal would be indicated when the price of the stock exceeds the top of the box. A “sell” signal would be indicated when the price of the stock falls below the bottom of the box.
Sample output from the DarvasBoxes table in the Olaptrader SQL database.
You can see that on June 04, 1990 an existing Darvas Box was breached to the upside (black squares). This is a buy signal. A new box has not yet been formed however. A type of computer program called a “State Machine” is used to scan future bars until the proper criteria are met for the formation of a new box. In the example above, this occurred on June 13, 1990. If a trader has purchased the stock on June 04, he will sit and wait until the stock price breaches this box to the upside or downside. This will be a trade signal. If it breaches to the upside, the trader does nothing or buys more. If it breaches the box to the downside it is a sell signal. On June 15, 1990, the stock price (either Open, Low, or Close) caused a downside breach of the existing box. The stock bounced around for a couple of weeks until the criteria were met for a new box. This occurred on July 02, 1990 but was very short-lived.
The trader is looking for a situation in which the trend continues. The illustration below shows Darvas Boxes in a continuing trend down and then up. A short seller would have made money if he shorted at $33.00 per share. A buyer would have made a profit if he waited until a bullish box was formed. This occurred at approximately 26.72. He would then do nothing, or buy more if the stock broke out of this box to the upside. You can see that it did so at $29.00 per share.
As you can see, Darvas Boxes are relatively simple to trade with but should be combined with other indicators in order to take full advantage of them.
The original point of creating the Darvas Box table was to test the accuracy of this technical indicator. When used in conjunction with the historical OHLCV in a source table, one can find the percent price rise or fall x number of days after a box had been formed. One would take a statistically relevant sampling of stocks and calculate the average price increase or decrease for bullish or bearish boxes. If, after determining that this indicator is one which you would like to use, you can then refine the results by combining with other indicators.
For example, you decide that the average percent increase over one month for bullish Darvas Box formations is significant. You might want to then create a report in which you are comparing stocks which meet these criteria and, additionally exhibit a “Morning Doji Star” candlestick (bullish candlestick). Once you have determined the combination of indicators which appeals to you, you then scan for these using your favorite trading software. Ideally you will be able to subscribe to Olaptrader “Quicksight” AWS dashboards to accomplish this. Before we get to that point, we here at Olaptrader will simply be providing as much raw technical indicator data that we can. You are free to import it into your own software to analyze.