Lessons from Darvas


Date: 8/17/2021
Author: Chris Hood


Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.

For those looking to do some reading on great traders, I highly recommend the classic book by Nicolas Darvas, “How I Made $2,000,000 in the Stock Market”.

Though Darvas wrote the book in 1960 and didn’t trade options, the insights of his self-taught trading career are valuable to this day.

Let me give you a little background.

Darvas was a Hungarian dancer who fled his home country during WWII to avoid the advancing armies of both the Germans and the Soviet Union. Meeting up with his sister in Turkey, they formed an act that entertained audiences worldwide.

While touring, Darvas began trading stocks. He read Barron’s religiously and received regular stock quotes from his broker via telegram.

Like most traders, he recounts his wins and losses, excitement and frustration.

His first approach was to take stock tips from those he assumed were in the know. Rich people.

The rich had money, and most were invested in the market, so he asked them.

This did nothing but increase his frustration.

“The question was always on my lips: ‘Do you know a good stock?’ Oddly enough everybody did seem to know one…Apparently I was the only man in America that did not have his own first-hand stock market information…It took me a long time to discover that this is the one method that never works.”

This is as true today as in the early 1950s.

His next method was to pore over the fundamentals of each company, trading based on financial statements. Darvas looked for bargains on ‘undervalued’ tickers and hoped they would rise.

Some did, but most did not.

Fortunately, he protected most of his capital through the use of tight stop-loss orders and was able to remain in the game.

Frustrated, began developing a system that would become the ‘Darvas Box Theory’ to trade breakouts. It’s a system that is still used today in various forms.

Darvas mostly abandoned fundamental analysis, realizing:

“I knew that I had to adopt a cold, unemotional attitude towards 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 fall.”

After making his first half-million dollars from an initial trading stake of 3,000.00, he moved to New York.

Being in the hub of market activity on Wall Street would take his performance to the next level.

No more telegrams and charts. Darvas would get his information straight from the big money players and high-performance brokers.

It became known as what he considered his “Second Crisis” in the market. Soon, he learned the hard lessons the market dishes out for hubris.

“The truth was that as my pocket had strengthened, my head had weakened. I became over-confident, and that is the most dangerous state of mind anyone can develop in the stock market.”

Abandoning the technical system that had earned him so much money, Darvas was back in the original trap of taking stock tips.

His string of losses mounted, and before long, his account was down 100K.

On reflection, he understood why:

“…I threw overboard everything that I had learned over the past six years. I did everything I had trained myself not to do. I talked to brokers. I listened to rumors. I was never off the ticker.”

Darvas quickly realized that his distance from the noise and chatter had given him perspective and kept him from distraction.

He moved away from the financial center began having his broker simply provide quotes by telegram.

Darvas’ account ballooned and eventually broke two million.

So what lessons can we learn from all this?

FIRST, data-driven technical analysis provides all the information you really need to know. So, design your system and trade to your rules.

SECOND, never become overconfident and emotional. The market teaches hard lessons to those who oversize positions and believe they can’t lose.

And FINALLY, stop listening to other people’s opinions. Whether they’re cab drivers, wealthy investors, or brokers, they have no idea what a stock will do.

Here’s the recipe for trading success.

Build a plan and follow it. Develop emotional control. And, never let another’s opinion influence your trades.

Chris Hood


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