How I made $2,000,000 In The Stock Market by Nicolas Darvas was one of the first trading books I ever bought back in April 1999. It’s a classic, especially the Box Thory, and it’s about Darvas’ trading and investing back in the 1950s and 60s. What is Nicolas Darvas Box Theory?
But don’t let the age of the book scare you away. It has a few invaluable trading lessons. You will not learn a specific trading strategy, although Darva’s Box Theory was at the heart of Darvas’ trading. Instead, the book is an odyssey about a struggling trader that turned it around based on good decision making, persistence, and good trading records.
Who is Nicolas Darvas?
Nicolas Darvas was born in 1920 and died in 1977. But in his short life, he probably experienced a lot more than most people can only dream of.
He was Hungarian and started studying economics in Budapest, but fled when the Nazis and Soviets started fighting for control. He went on to become a professional dancer with his sister and emigrated to the US.
Nicolas Darvas is not famous for his dancing career, even though he toured with both Bob Hope and Judy Garland. Darvas is practically only known for his book called How I made $2,000,000 In The Stock Market.
Darvas’ trading strategy was a mix of being a short-term trader and a long-term investor. He struggled to start with, just as most traders do. It was not until he had lost some money he sat down and studied his buying and selling. He then developed his “Box Theory”:
Nicolas Darvas’ strategy: The Box Theory trading strategy
Darvas got famous after he published his book that described his Box Theory. This theory or strategy is pretty basic and simple, yet it was very powerful at the time (we doubt it works in today’s markets). How do you use Darvas Box?
The logic is that the share price moves up and down in boxes. After a rise, the price tends to consolidate in a “box” before it subsequently moves up or down outside the box or vice versa. This is all there is to it except for two more things: stop-loss and volume. What is price minimum in Darvas Box? Darvas didn’t mention, so it’s up tp ypu-
When the share price moves out of the box it needs to have increased volume. Indirectly the strategy was about trend-following because he used stop-loss strictly. The win ratio was around 50% but the bigger gains of the winners more than made up for the losers.
Was this a quantified strategy? No, he used stocks he believed had favorable fundamentals.
As you probably have guessed by now, he went on to make two million dollars via his Box Theory. This was a huge amount of money back then, and it’s even a very nice nest egg in today’s money.
Regrettably, the Box Theory is not very well explained. We suspect his trading was much more reliant on his “gut feel” than what he tries to communicate throughout his book.
The keys to Nicolas Darvas’ success
Before Darvas went on to make much money he struggled, as most traders and investors do. How did he manage to turn around losses to huge profits?
He won and lost several times, but his humility and ability to analyze improved his skills. Darvas was good at making decisions and not judging the outcome of the decision, something you can read more about in Annie Duke’s Thinking In Bets. Darvas kept a trading journal that helped him immensely. He analyzed his trades and behavior and he made rational adjustments based on his trading journal.
Another key for success was Nicolas Darvas’ persistence. Most people get scared away after setbacks and losses, but Darvas was confident in his abilities if he just kept going and learning.
Nicolas Darvas realized early on that he had to take responsibility for his actions and trading. Nobody would teach him how to invest and trade, and certainly not brokers and advisers. Part of his reason becoming successful was that he used book writing as “therapy”.
Other famous traders and their trading strategies
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- How Jim Simons’ trading strategies Made 66% A Year (The Medallion Fund)
- Ray Dalio – life, investment strategies, and philosophy
- Jesse Livermore – The World’s Most Legendary Trader? (Trading strategy quotes)
- Richard Dennis – The Turtle Trader (trend follower)
- William Eckhardt – The mathematical trader (An early Nassim Taleb)
- Stanley Druckenmiller – George Soros’ left hand
- Paul Tudor Jones – Maverick Trader (quotes and strategies)
- Micheal Steinhardt – To Make Money Is Should Be A Little Painful
- David Einhorn – investment strategy and philosophy
- Bill Ackman – investment strategy and philosophy
- Steve Cohen – Stock Market Wizard
- Mark Douglas – All About The Correct Trading Strategy Mindset
- Steve Clark – hedge fund strategy market wizard
- Larry Williams – Indicator Innovator, Strategy Trader, And Tax Rebellion
- Jim Rogers – The Adventurist Macro Trader
- Larry Hite – All About Trading Strategy Risk
- Randy McKay – Market Wizard currency strategy trader
- Michael Marcus – The First Trading Strategy Market Wizard
- Charles Faulkner – Trading strategy trader and programmer
- Richard Driehaus – Turtle Strategy Trader
- Dana Galante – the Market Wizard short seller
- Linda Raschke – Tape Reading Trading Strategy
- David Shaw – the king of quant – trading strategies
- Van K. Tharp – The psychology of trading
- Larry Connors – Mean Reversion Trader
- Rob Hanna – Quantifiable Edges
- Ahmet Okumus – From Istanbul to Wall Street
- Steve Watson – Small cap investor
- Gil Blake – The master of consistency
- Blair Hull – All about the trading edge
- Howard Seidler – an original Turtle Trader (The Turtle Experiment)
- Steve Lescarbeau – mutual fund trader
- Tom Basso – Mr. Serenity
- Bruce Kovner – Trade Small And Manage Risk
- Michael Carr – Trader, Motivator, And Speaker
- Bill Lipschutz – FOREX trader
- Brett Steenbarger – All About Trading Psychology
- Joe Ritchie – an early quant in the option markets
- Micheal Masters – Stock Market Wizard
- Monroe Trout – one of the first Market Wizards
- Alexander Elder – Trading Author And Indicator Innovator
- Mark Ritchie – Master Option Trader (God In The Pits)
- Alphonse Fletcher Jr. – Triple Digit Returns
- Mark Minervini – stock market wizard trader
- Mark D. Cook – market wizard trader and investor (Net worth and strategy)
- Jeffrey Yass – the founder of Susquehanna
- Claudio Guazzoni – Multillingual trader
- Micheal Lauer – Stock Market Wizard?
Timeless Trading Strategy Lessons From Nicolas Darvas
What, then, is the main trading lessons from the book? The book is short, but below is a few takeaways and excerpts from his book:
My estimate that I would be right half of the time could be optimistic. But at last I saw my problem more clearly than ever. I knew that I had to adopt a cold, unemotional attitude toward stocks; that I must not fall in love with them when they rose and I must not get angry when they fell; that there are no such animals as good or bad stocks. There are only rising and falling stocks – and I should hold the rising ones and sell those that fell.
- I should not follow advisory services. They are not infallible, either in Canada or on Wall Street.
- I should be cautious with brokers’ advice. They can be wrong.
- I should ignore Wall Street sayings, no matter how ancient and revered.
- I should not trade “over the counter” – only in listed stocks where there is always a buyer when I want to sell.
- I should not listen to rumors, no matter how well-founded they may appear.
- The fundamental approach worked better for me than gambling. I should study it.
- There is no sure thing in the market – I was bound to be wrong half of the time.
- I must accept this fact and readjust myself accordingly – my pride and ego would have to be subdued.
- I must become an impartial diagnostician, who does not identify himself with any theory or stock.
- I cannot merely take chances. First, I have to reduce my risks as far as humanly possible.
When a share is in an uptrend, we should hold on to the share and not hurry to sell it off. If the share is in an uptrend, then we have a chance to make a good profit there. On the other hand, when the share indicates or gives a signal of moving in the downtrend, then we should sell it off early.