The author realized that making a profit in the stock market isn't a matter of luck. One can be lucky once or twice but not consistently.
He then bought stocks of M&M Wood Working on the same principles as Texas Gulf Producing. He did not know much about it but assumed from its continuous rising and high volume that some people knew a lot more about it. He made a profit in the stock.
Later he bought 200 shares of Pittsburgh Metallurgical and incurred a loss of $2023. After an extensive analysis, he found that he had bought the stock at the top of an 18-point rise. It was the right stock bought at the wrong time.
He learned that stocks do not move haphazardly. Their movement is determined by an upper and lower limit. These limits act as a perimeter which the author called “boxes”. The stock price oscillates in these boxes. This was the inception of his Box Theory.
He then used his theory on 3 stocks to make a profit but suffered a significant loss in the 4th one, which took him back to where he had started. This experience taught him the following lessons–
- There are no sure things in trading. Anything can happen in the stock market. Even the best traders have about a 50% win rate in their trading.
- A trader's goal is not to be right every time. It is to lose little when wrong and win big when right. The main goal is to make money and not prove anything to anyone. Hence, there is no place for pride and ego.
- It is better not to stick to any theory. The actual price action should be traded, not the personal opinions about where the market ‘should’ be going.
- Reduce the risks as far as possible. The key to successful trading is to maximize profits and minimize risks. A big risk for little profit is dangerous and eventually tends to blow up the account.
The author started including stop loss in his orders so that just when the stock falls below the expected price, he would not own them.
He defined his goals in the market as follows:
- Right stocks
- Right timing
- Small losses
- Big profits
To realize these goals, he had the subsequent tools:
- Price and Volume
- Box theory
- Automatic buy-order
- Stop-loss sell-order
Takeaway- Trading with luck is mere gambling. Good traders are not gamblers; they have a proven method that allows them to trade with the odds in their favour.
The price action of each stock tells a story. Daily increasing prices represent increasing demand and the unwillingness of holders to turn it loose. Stagnant prices show their indifference either way up or down. A trading range of stock shows where the buyers are willing to step in and where they are waiting to sell the stock.
A stock with continuously increasing volume shows that many people are accumulating it at even higher prices because they know about its future potential. Instead of looking for the reason, it is good to get on board and see how far it takes.
The two elements for successful trading are finding the right stock with the potential to trend up in price and then buying it at the right time. Buying it too early could result in dead money and buying it after it has run too far will be the end of the trend. Buying it on the initial breakout of the Darvas price box is essential for being successful.
Studying the last year's chart of any stock is important to ascertain its support and resistance levels. These levels are meaningful because traders and investors wait to get in or out of a trade at those prices.
An exit strategy is important in every trade to lock in profits on the winners to avoid holding them as they become losers.
Darvas did not exit based on his sentiment. He continuously moved a stop loss up to the point where he would be stopped out if price boxes started turning around. This helped him to take out with profits still intact.