Darvas principle in a nutshell-
1. Go long only in a market that is in an uptrend
According to the author, when the market is above the 50 day simple moving average it is in an uptrend. If it falls below the 50 day it is perhaps the beginning of a downtrend. If there is a reversal near the 200-day simple moving average, it is an indication to start taking small long positions again.
2. Only trade the Monster stocks.
Buy the best stocks to make the most money. The best stocks are those that would be changing an industry or even the world through new products or services, innovation or advanced technology that gives them a huge advantage over their competition. Growth is what one should look for.
3. Enter stocks at high probability moments.
The key entry points for Darvas stocks are:
- At a breakout to new all-time highs in price.
- Price bouncing at the bottom of a well-defined Darvas price box.
- The stock bounces off or breaks out above the 50 or 200 day moving average.
4. Let the winner run.
Do not limit the upside potential. The right stock in the right market can make a run that is beyond anyone’s prediction, measurement or target.
5. If you are wrong, get out quickly.
Keeping losses small is the biggest key that separates winning trades from losing trades. Stop loss and trailing stop should not be neglected.
6. Do not waste your emotional and mental capital watching every tick of your stock.
Many traders lose because they just get burnt out because of the market fluctuations. Losing and making money minute by minute. According to the Darvas system, buy stops, limit orders and stop losses or just check the open and close prices to see what is going on.
7. Always do your homework.
Even when the market is bearish, never stop looking for the potential stocks.Traders have to be ready always to start buying when the time is right. Keep a watch list and watch it.
Never add to a losing trade. It ruins the trading, mental and emotional capital. The key is to add early to the winning trades not late in the move.