Nicolas Darvas (1920-1977) was a famous dancer and successful investor who has become an inspiration for millions of people around the world. Forced to leave his native country, Hungary, in 1943, he formed a dancing team with his half-sister Julia and together they became one of the most popular professional dancing duos in post-war Europe.
Nicolas used his free hours during their tours to educate himself in stock market trading. He read hundreds of books and a few years later he was ready to apply his accumulated knowledge to the Canadian stock markets where he started his career as a trader. But it was only after Nicolas Darvas started trading on the New York Stock Exchange (NYSE), he began to make sustainable profits. He developed a very efficient trading system that allowed him to make over $2 million with an initial capital of just $36,000. Later, he would describe this strategy, called “Box System”, in his bestselling book “How I Made $2 Million In The Stock Market”. Here are some tips based on the rich experience of this legendary investor.
Identify the Candidates
Darvas started trading during times when you needed a full-service broker, which charged high commissions. In order to be profitable on the markets, Darvas had to filter the potential trading candidates using certain rules. For instance, he would look for industries that were expected to do well in the following 20 years. Of course, the leading industries are always changing and you must have a keen eye for the next big thing in order to make the right choice. Darvas taught us to research the market history and find the instruments with the greatest growth potential.
Trade Outside the Box
The main indicator that Darvas used was volume. He would closely follow the trading volumes of the selected stocks and wait for an unusually high trading volume in any of them. The idea was to monitor the behavior of the price, defined by a three-day low level and a three-day high level. He would keep an eye on price fluctuations and form “boxes”; he explained that “the top of the box is established when the stock does not touch or penetrate a previously set new high for three consecutive days. This is true – in reverse – for the bottom of the box.” According to this “Box system”, a trader should buy when the price rises out of the box and also set a stop-loss level just below this trade price.
Find Your Own Path
Even though Darvas had some economic background and had read a great number of books related to stock market trading, he decided to come up with his own trading philosophy. If you were to take just one thing from his story, then let this be it. We cannot stress strongly enough how important it is to rely on your own skills and not to trust blindly any market advice. Just like the most successful investors in history, Darvas walked a long way to find this wisdom. In the end, it was his perseverance and determination that helped him become a millionaire.
Forget About Your Ego
Do not try to out-power the market because you will almost certainly fail to do so. A willingness to admit a mistake is fundamental for a successful trader. Simply accept that you are wrong and move on instead of insisting on a losing trade. To illustrate this tip, Darvas uses the analogy of the roulette wheel where the dealer allows you to take back a big part of your investment even when you are wrong. Get out of the situation fast and take some time to learn from every mistake. Do not allow yourself to hold on to a loser or sell a winner. The key to achieve this is to forget about your ego the moment you start trading in the financial markets.
Recognize Market Trends
Darvas was a strong believer in the supply and demand theory and was pretty confident that the price is based mainly on this fundamental marketplace law. In his words there are no good or bad stocks; there are only instruments on the rise and instruments that are in decline. Therefore, it is very important to recognize market trends and stick to them because most financial instruments will follow general market trends. Of course, there are always exceptions but they only confirm this basic rule. The same applies to stocks in different industries as the majority of instruments in a group tend to follow the leader.
Stay Focused
As stated by Darvas, there are three main factors that can make you fail in the markets: 1) you feel desperate to trade after a loss, 2) you are overly confident or 3) you simply forget to follow the predefined plan. Each one of these things is a clear sign that you have lost your focus and have to regain it. The easiest way to do it is by taking note of the reasons that make you trade and try to find the thought patterns that contribute to a loss. Then try to retrain your emotions and see the results.
In order to start applying these investment rules open a demo account or live account with a Forex Broker. This way you can trade Forex, CFDs on stocks, indices, precious metals, oil, and other instruments on the financial markets.
This post was provided by LiteForex, a leading Forex, and CFD broker.
No comments:
Post a Comment