The Darvas box theory is based on the work of Nicolas Darvas, author of the book How I Made $2 Million in the Stock Market. This indicator uses his box theory to help visualize upward trends and find potential opportunities to buy or add to a position.
Darvas was a growth stock trader. After extensive study of historical stock movements, Darvas noted stocks “have a defined upward or downward trend which, once established, tended to continue. Within this trend stocks moved in a series of frames, or what I began to call boxes.“
Install the latest release of Darvas Box Theory – Tracking Uptrends indicator.
Darvas Box Theory
■ A box defines a high and low range that contains a stock’s movement over a period of time.
■ Darvas preferred “lively” stocks that moved up and down within a box. In his research, Darvas noted stocks with these characteristics often had significant moves up.
■ Boxes stacked one after another often indicate a strong upward trend.
■ A potential buy signal is a stock moving past the high of the topmost box with a significant increase in volume.
■ Within the range of a box, Darvas considered movement to the bottom of the range a healthy sign. These moves down shakeout weak holders who sell thinking the downward trend may continue.
Defining a Box
■ After price makes a new high, there must be three consecutive bars that don’t exceed the high.
■ Once the top of the box is set, the same process is used, in reverse, to determine the bottom.
■ Once the high and low are established, a box is drawn over the range of bars.
■ With this indicator, there are two options to determine when a box is complete, that is, when a box is fully enclosed and a new box can be started. The default is when there is a close above or below the high or low of the box. Using the close may provide a better perspective of the overall trend by limiting noise of price movements within a bar. The second option to complete a box is when a bar’s high or low goes above or below the boundaries of the box. The preferred option is configurable within the indicator Settings.
■ The lookback range is used to determine if the current bar has reached a new high, which could indicate the start of a new box.
■ The value specified for the lookback determines how many bars back to compare against the current bar high.
■ You can set the lookback value for intraday, daily and weekly charts.
■ It’s recommended to experiment with lookback values across various timeframes to find settings that fit with your trading style.
Suggestions from Darvas
■ The box theory works best during a strong uptrend, where boxes stack one after another.
■ When breaking through the top of the box, ideally there will be a significant increase in volume. This may be an opportunity to buy or add to a position.
■ Try and hold stocks that are consistently moving up by raising a stop-loss along with the rise.
■ Take losses quickly.
■ Box completion can be based on a close above/below the box boundaries or a move above/below the box boundaries.
■ Configure the lookback range for intraday, daily and weekly charts.
■ Configure box borders and background colors.
■ When the last bar is within a box, show an optional breakout price indicating a move above top of box.