Nicolas Darvas: Lessons From A Trading Legend
Introduction:
Every so often we like to re-read “classic investingbooks. This week we will discuss several of the invaluable lessons found in “How I Made Two Million Dollars in TheStock Market” by Nicolas Darvas. This is an excellent story about how the market “really works” and illustrates how Darvas evolved as a trader. He began, like most people, with no idea on how the market functions. After several successive failures he went through a severe period of introspection and began “learning” how the market worked.
Lesson 1: Focus On Strong Fundamentals
His first major realization was that he had to narrow down the list of stocks he was involved with. He did this by focusing on the company’s fundamentals and the stock’s technicals. He quickly realized that companies that exhibited strong fundamentals (impressive earnings and sales growth) enjoyed solid stock price appreciation. However, he soon realized that this was one “half” of the equation.
Lesson 2: Strong Technicals Matter
This lead him to his next realization, which later became known as, “Darvas Boxes,” occurred when he realized the importance of buying strength and began understanding how stocks move (i.e. rally, consolidate, rally, top out, and then fall). Each consolidation became known as “boxes.” Darvas developed/refined his “rules” through post analysis while he was working overseas (with very limited connection to Wall Street). The only access he had to Wall Street were overnight cables from his broker(s) and a weekly edition of Barron’s. His daily cables helped him keep track of his individual holdings and his weekly edition of Barron’s helped him isolate stocks that exhibited strong price and volume action.
Lesson 3: Follow Rules
Even after his two year dancing contract had expired Darvas, decided to continue this “distant” relationship with Wall Street. This kept him separated from the “crowd” andthe various rumors which constantly plague the Street. Bysimply following the stocks price and volume action, Darvaswas able to create/refine a trading methodology which hasshaped the thinking/writing for investors until present day.Like many things in life there is more than one wayto invest.
Even after his two year dancing contract had expired Darvas, decided to continue this “distant” relationship with Wall Street. This kept him separated from the “crowd” andthe various rumors which constantly plague the Street. Bysimply following the stocks price and volume action, Darvaswas able to create/refine a trading methodology which hasshaped the thinking/writing for investors until present day.Like many things in life there is more than one wayto invest.
Lesson 4: Be Flexible
Some of our closest friends and readers are“pure” fundamentalists. We can talk for endless hours (perhaps weeks) with little avail to convince them otherwise. We also have friends/readers that invest strictly on the underlying technicals and the same is true for them. Here, at Sarhan Capital, we infuse the most pertinent fundamental and technical analysis and have realized that this formula best matches our personality/trading habits. Asking which is “correct” or “incorrect” is a futile exercise since there are an infinite amount of “correct” and “incorrect” ways to invest and trade capital markets. The key is find the “best strategy” that fits your personality and trading habits and make it work for you.
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