What is the Darvas Box and can the Darvas Box generate profits for you?

The Darvas Box was innovated in 1958 by Nicholas Darvas, a ballroom dancer who had a proclivity for investing in the equities market.  Darvas’ strategy became known simply as the Darvas Box and it has been modified a bit to fit different strategies in modern times.  In this article, the Darvas Box Indicator, and the modified strategies will be backtested.  Is the Darvas Box worthy of being a strategy in YOUR portfolio?

Let’s find out!  But first…

What’s a Darvas Box?

A Darvas Box is more-or-less a consolidated price range that is actually a price channel with rules associated with it and the creation of the Box or technically a channel.  The Darvas Box first applied to the stock market and was associated with daily charts.  The original rules for the Darvas Box were a bit vague, but they brought about results and it was initially a long position only strategy.  Times have of course changed, which means that the Darvas Box can go both ways, but first it is time to dust off the Original Darvas Box.

Original Darvas Box Rules (the initial filter):

1- Only buy companies “whose growth and earnings prospects look highly promising.”

2- Avoid companies that are “already so big that the prospect of any further substantial growth is highly unlikely.”

3- “Check the overall market trend to ascertain whether stocks in general are in an uptrend.”

4- “Check whether the stock belongs to a strong industry group, i.e., a group that is performing well in the market relative to other groups.”

5- Consider the stock only “if it is rising in price on high volume.”

Darvas saw prices as a series of ranges (boxes) that are only worth investing if the ranges made higher highs and higher lows.  He looked essentially for a zone of consolidation that was set to rise to another higher range.  He created a box based on lows and highs within a particular time period.

The general vagueness as far as terminology is why devotees to Darvas’ philosophy have modified the rules that Darvas created for the purposes of trading and investing in other markets and market conditions.

This article is devoted to the modifications that keep with the spirit of Darvas’ rules as they are unfortunately impossible to truly replicate without understanding the original intent of Nicholas Darvas.

The Modified Darvas Box Backtested

Two different approaches will be taken toward the Darvas Box, which were published on two different sites.  They will be tested on Daily Charts with EURUSD and USDJPY over the course of June 1, 2016 through May 31, 2018.

Darvas Modified Approach #1

Long Entry Rules

1. Find a new 52 week high.
2. The highest high in a four day period is the first of the four days examined, this is the Box’s Top.
3. The lowest low in a four day period is the first of the four days examined, this is the Box’s Bottom.
4. Once the box is created, a close above the top of the box signals a long position. Buy on the open.

Buy Exit Rules

• Stop Loss:  A close below the bottom of the box is the stop loss.
• Take Profit:  Triple the Stop Loss pip distance so that it is a 3:1 reward to risk ratio.

Short Entry Rules

1. Find a new 52 week low.
2. The highest high in a four day period is the first of the four days examined, this is the Box’s Top.
3. The lowest low in a four day period is the first of the four days examined, this is the Box’s Bottom.
4. Once the box is created, a close below the bottom of the box signals a short position. Sell on the open.

Sell Exit Rules

• Stop Loss:  A close above the top of the box is the stop loss.
• Take Profit:  Triple the Stop Loss pip distance so that it is a 3:1 reward to risk ratio.

EURUSD

USDJPY

Darvas Box Modified Approach #2

Long Entry Rules

1. Price is trading within 10% of an 52-week high and above the 20-day and 50-day SMAs.
2. Price stays within this 10% range for a minimum of three weeks.
3. High and Low of the range are established.
4. Trade up through resistance on greater than 30-day average volume.
5. Price closes above the previous price high

Buy Exit Rules

• Stop Loss:  A close below the bottom of the box is the stop loss.
• Take Profit:  Triple the Stop Loss pip distance so that it is a 3:1 reward to risk ratio.

Short Entry Rules

1. Price is trading within 10% of an 52-week low and below the 20-day and 50-day SMAs.
2. Price stays within this 10% range for a minimum of three weeks.
3. High and Low of the range are established.
4. Trade down through resistance on greater than 30-day average volume.
5. Price closes below the previous price low

Sell Exit Rules

• Stop Loss:  A close above the top of the box is the stop loss.
• Take Profit:  Triple the Stop Loss pip distance so that it is a 3:1 reward to risk ratio.

EURUSD

USDJPY

Has the Darvas Box been effective?

Not exactly.  The Darvas Box is very dependent on markets that are clearly trending one way or another.  Choppiness produces issues for the Darvas Box.  The vagueness of the rules surrounding the Darvas Box Theory are a challenge and the modified solutions proposed did not translate well to the tested period.

Using a timeframe that is shorter would just provide more of the same sort of results, but with more instances.  Maybe there is a better way to implement a Darvas Box or perhaps better rules for the Darvas Box, which would be worthy of exploring in another article.

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