Nicolas Darvas: How I Made 2,000,000.00 in the Stock Market

[I]When I went into the accounts more closely I found I had the unenviable distinction of coming out of the greatest bull market in history with a lot of experience, a great amount of knowledge, much more confidence-- and a net loss of $889.[/I]

[I]The solution was whispering to me but at first I could not credit it. It was so surprising, so simple and yet so extraordinary that I could hardly believe it. It was: My ears were my enemy.[/I]

Nicolas Darvas wrote these lines in his investment classic: [I]How I Made 2,000,000 in the Stock Market[/I]. With a politically strong minority playing, as the Mad Hedge Fund Trader puts it, with "matches in a firecracker factory" and with my equity accounts stopped out in their worst month yet because of this danger, I thought it worthwhile to reconsider Darvas' classic book. I'm glad I did, and I'd like to share some insights with the Effective Volume community.

Darvas recounts honestly the circumstances and discoveries that began with an unexpected windfall profit close to 8,000 USD on a stock that came to him in his professional services as a dancer. Published in 1960, much of what Darvas discovered on his own over five years of trial and error will be very well known to all members of this community. He first discovered a pattern which he called boxes. We know them today as Darvas boxes. Prices will set up within a framework of highs and lows that can be conceived as a box. When a stock breaks out of a box, it has a very good chance of remaining in the new box and even moving higher. While my ToS software has an indicator called "Darvas Box"; many people today refer to them on multiple time frames as consolidation patterns. Darvas also discloses how he learned to use trailing stop losses to protect him from big losses, how earnings and new industries proved to be most reliable fundamental indicators, and how he could grow his portfolio substantially by simply avoiding bear markets. While Darvas developed his approach independent of his brokers, it appears that others, notably William J. O'Neil, were also coming to similar conclusions. To read [I]How to Make Money in Stocks[/I] by O'Neil and [I]How I made 2,000,000 in the Stock Market [/I] is to read meditations on the same themes: stocks can be bought at high prices with the expectation that they can go higher from their bases or boxes; the market will determine the fate of most stocks; and money management is key to success in the business. To anyone who has not read these books, I think there is universal agreement in the investment community that one probably should.

Darvas’ thought and experience has profound relevance for me as an individual investor. Nearly 11 months have gone by since I started in late August 2010. A huge leg of a bull market began, and I certainly had no idea what to do. My most profitable trades were made under the direction of Gil Morales and Dr. Kacher—two O’Neil protégés. Despite my successes with their methods (including +40%) in one account, my year-end numbers in total are not so nearly exciting. In recent weeks the markets have taken their cuts, and I write this with a lot more experience and a lot more knowledge but not terribly more money than in September 2010. Darvas took five years to develop his methods; I’m fortunate to find excellent helpers, who have probably cut down my learning curve substantially.

And this brings me to the last and probably most neglected discovery of Darvas: he could invest and prosper much more effectively without paying attention to the daily chatter of Wall Street and the investing community. Today, the internet swamps us with every form of information (including, to be sure, this book review!). But I’m not certain that it helps all that much. My biggest plays of the year were made in a Vanguard account with no margin. For this reason I could not move in and out of positions frequently without triggering threats to freeze my account. As a result, I took fewer chances, considered thoroughly my choices, and held positions with more temerity. In fact, my most profitable holding by absolute gain was a mere 75 shares in AGQ.

Billy tells me that his technical analysis is also built upon the work of Darvas. All subscribers to the Robots can find Billy’s unique and expertly drawn boxes of price support in his morning bulletins. Personally, I am hoping that I can take a Darvas-like stance toward the robot and make my choices without emotion. I plan to buy only the strong and very strong signals and leave it at that. To be honest, I have more important things to do with my life than monitor the global market place 24/7. I’m 47 and I don’t hear the ring of the celestial spheres in stock patterns but I do in other pursuits.

This brings me to final point. Nicolas Darvas developed his approach through careful study of price patterns in top stocks. When I read the book, I can see at work the professionally trained eye of a dancer who breaks complex movements into a series of steps or, yes, boxes. When I study the routines of, Paul Duncan and Jeffrey Scott, for example, I can perceive a nearly baroque attention to detail and pattern. I admire this ability. I think I can train myself to sort and compare similarly. But the robot puts this effort into question. Does one need to go to great lengths when a robot can inform me of a pattern’s historical success rate and likely outcome? Perhaps not.

I wonder what others conclude.

Nicola,

I am struck by your post and your honesty. You mention that you have been trading since late 2010. The market has been trendless for most of this period. Nicolas Darvas and Bill O'Neil both know that there is a time to be in the market and a time to be out. Short term traders can find opportunities in range bound markets. Medium to longer term players require a real trend to follow. A sideways trending market for seven months is building gas in the tank for a move in one direction or the other. I don't know many CANSLIM practicioners who are doing well in this environment. Most are lightly engaged biding our time for a trend to unfold. In the history of the market the third year of a bull market is often choppy and makes little progress. Choppy markets can eat the portfolio of medium term players. The choices are to go to the beach or perhaps as you are doing working the shorter term market moves using the Robot.

Nickola,

Thank you for the candid post. I think experience is the only way to learn in the markets. Don't be surprised by setbacks. Like you, I am experiencing a bull cycle for the first time in my life and have also had setbacks. In hindsight, doing nothing would have often been a better decision. But one doesn't live in hindsight, so learning to let go is an important and ongoing lesson. Additionally, such experiences provide insight about your own identity as a trader and an investor.

We don't possess the experience that others like Mike, Billy, and Pascal have, which includes trading through multiple market cycles. The best thing for me has been to surround myself with such company, be persistent, and learn. Writing is really helpful for me to explore my progress and where I need work. Also, you sound like you have an interest in discretionary trading. That is something I have thought about a lot, since it likely requires more time, practice, and patience than following a mechanical system; however, that realm is where I have a candid interest, so I am still pursuing it even though much energy is demanded. I wouldn't know this about myself, though, if not for exploring various approaches. If you can't shake that interest, then it will be important to figure out what methods you would like to incorporate into your analysis.

I am thankful that you are here participating.

Best
Eric

Hi--

The question that I really want to ponder is this: Does the capacity of the Robot to analyze money flows and technical patterns render our own homework obsolete?

Unlike Darvas who developed his theory (at least as he tells it) from scratch, the Robots promise to relieve us of this burden. Instead of going over data to determine boxes, or bases, or even pocket pivots, I can allow a machine to make more precise and even safer calls for me. Moreover, I can give my attention to other pursuits rather than challenge myself to become an excellent speculator.

I am always struck that Darvas' final obstacle was the noise of the market. But not only can we learn from Darvas to turn down market noise, but we can hand over all analytic duties to the machine. We only need read its commands and input them into our trading platforms.

As a former tournament chess player, this is akin to me being allowed to use a device to play entire games for me. As a player I may know that the computer will not always play the absolute best moves and sometimes, as an experienced player, I may even know that its move or moves are not the best at all; but I know, too, that if I allow the machine to play for me I will probably win the tournament; moreover, any discretionary intervention only lowers the over all odds of victory. Now let's say other players are employing their computers (as is the case in the markets), I know my machine is making strong choices and will probably not lose many games, though it might draw many against other computers. As a player I may be able to play anti-computer systems and do about as well as my computer only when I'm in my best emotional and physical condition. But a computer program, so long as it is regularly updated and run on a strong computer, never has a bad day; and it never succumbs to noise. What would any rational person do? So long as results are paramount (and in the stock market what else matters?), the only rational choice is to trust the machine. I have come to a similar conclusion regarding the robots.

Darvas teaches that learning to invest is a process full of traps and errors and that one can overcome via the use of intelligence to discern the accumulations of instituional buyers in the boxes and bases of high flying stocks. But-- again-- the Robots provide artificial intelligence which renders the virtue and skill of stock selection, purchase and selling quaintly obsolete.

As for the honesty of my post: I think my struggles are typical. At this point, I'm taking Darvis seriously enough to realize that technical analysis, done rigorously, does not require that I pay attention to the noise of the media or even my trading platform, which informs me of every penny change in all the stocks I monitor. The real "honest" humanistic problem is posed to us by the Robots themselves.

Nickola,

The points you raise are valid. Ultimately, though, the robots are proprietary creations that Pascal and Billy have generously made available to subscribers. What if this service were no longer available, for one reason or another? Many here rely daily on the words Pascal and Billy share. I hope they will share their insights for many years to come, but in sharing their insights and toolset, they are teaching us "to fish," and that is where so much of the value is created. The same can probably be said of Gil and Dr. K.

Is there not value in a diversified set of methods? I believe there is, and one could easily allocate a portion of their funds to the robot while developing and fine-tuning other methods for which one is suited.

A CANSLIM investor might go for long periods (months or even years) with nominal returns, and then a growth market comes along and they make an absolute killing. But that only comes with practice and the likely challenges and trials that come with developing any skill.

To answer your question, I don't believe the robot makes homework obsolete, in so much as that homework reflects one's personal goals as a trader. If one is capable of developing and back-testing their own algorithms to create their own robot, then the answer could be different. But for someone like myself, not trained in mathematics and programming, I need to rely on more nuanced methods of interpreting the market, which boils down to experience, precedent, hard work, and study.

Perhaps my youth makes me a bit stubborn, and you do indeed have very salient points about the Robots. Many thanks for the thoughtful discussion.

Eric

I completely agree with you.

That Pascal and Billy have made a robot of this complexity available to us is, to me, a dream come true. Like you, I cannot concoct such a device. Yet, I want very much to develop the skills that will allow me to prosper as a speculator regardless of the fate of the robots.

But the fact remains: if I invest according to the robots, I'll probably do better over the coming months than by any other method. A strange dillemma: if I do the work and take the chances necessary for me to learn the "hard lessons" of trading, I'll miss out on gains in the meantime.

Also, I've turned only a portion of my assets to the robot. But is even this a rational choice? I think it is a hedge of sorts, which allows me to practice and develop skills that may prove useful. And yet, the absolute gains or losses may prove the robot a superior and more rational choice.

Since I know that the noise of the market detracts from my performance, I could take the time made available to me by the robots to develop skills in derivatives trading, for example. Ernst has shown us his successful strategy. To trade in options is a different business altogether. The study is difficult. But with professional technology available to amateurs through thinkorswim, amateurs can train to become professionals.

Lastly, I still once more agree with you that the people/teachers here offer a tremendous service for which I'm always deeply grateful.

Nickola,

First let me congratulate and thank you for this fantastic Darvas thread that you started.
The robots are simply taking advantage of technology. Many discretionary traders today are still trying to go from point A to B by foot or horse like their grand grand parents used to do. They try to be as fit as possible as athletes or horsemen.
Robot "car" drivers can go faster and more efficiently, in a more relaxed manner. They can enjoy a more comfortable life and may envision going much farther away to unsuspected destinations over time.
A car driver doesn't need to learn or know all of the car details; the car dealers and support service are here to control, check, maintain and repair. The driver only needs to choose a safe and sturdy car model for all kind of road environments. And a good support service. Learning to drive the car itself is very basic.
The choice between discretionary learning/trading and robot following is a psychological one. I've been a discretionary trader for 30 years myself, so I know what I'm talking about. When you are becoming good at it, the powerful satisfaction of being right on your own is an addictive drug. You tend to feel like you're on top of the world and becoming an unparalleled expert. You feel fairly rewarded for all your hard work. Then comes the big unexpected drawdown! Like the horse-rider falling or the walker with a broken leg. And you see that people driving cars are now far ahead of you.
Then you are humbled and depressed, realizing that the markets are not the place to nurture your ego. Everything else in life is, from dating to playing video games or chess tournaments (among humans). But the market is not here for making you an expert or the best trader/investor in the world. The market is here to offer opportunities for making money and the robot quantifies the probabilities and positive expectations of each opportunity.
The setups and risk management are based upon the multi-pivot clusters which are similar to Darvas boxes, looking ahead through one or two days of expected support and resistance confluences that are also quantified.
What is fabulous in your personal case, Nickola, is how quickly you’ve come to your conclusions. And I think that concentrating now on learning derivatives is indeed the best next step. The robot allows you to do it, relieving you from the hassle of daily discretionary analysis and decision-making. Like a car driver, you need focusing on going to Point C or D now, instead of wondering how to best walk or ride to go to point B.
Yes there is a risk that the robot or robot dealership may disappear one day for any reason. But there are more and more other robot shops around and you can then opt for the next best one.
Billy

[QUOTE=nickola.pazderic;15194]
That Pascal and Billy have made a robot of this complexity available to us is, to me, a dream come true.
But the fact remains: if I invest according to the robots, I'll probably do better over the coming months than by any other method. A strange dillemma: if I do the work and take the chances necessary for me to learn the "hard lessons" of trading, I'll miss out on gains in the meantime.
[/QUOTE]

Great points everyone,

to me, being allowed to participate in the VIT group was already a dream come true even before the advent of the robots.

Personally, I believe I could continue to improve knowing that with all probabilities the robot will perform much, much better.

While it would be unwise for me to allocate only a reduced part of my portfolio to the robots, I still leave to myself a portion big enough to psychologically hurt me whenever I take a loss, as well as to flatter myself when it goes beyond my expectation.

But being humble is one of the greatest lessons the market teaches you, and I have to rember myself that I am here to "make money, not trades".

Bottom line: my portfolio is not being hurt too much by my losses, neither increased too much by my gains, but I keep making experience knowing that some time in the future I could not have a robot to "pat my shoulder".

For this reason, I obviously separate my personal performance from the one of the robot: one can still make good "easy" money but at the same time can keep growing to be a better trader.

[QUOTE=Billy;15197]
Yes there is a risk that the robot or robot dealership may disappear one day for any reason. But there are more and more other robot shops around and you can then opt for the next best one.
Billy[/QUOTE]

You are right Billy, but believe me when I say that there are so many "smoke sellers" (an Italian way of saying) out there that it is not easy to find a good "car".

Darvas himself in his book speaks of his own sad experience when relying on other people's expertise: there were no robots at that time, but there sure were as many smoke sellers as there are today, and most probably today they are even more.

To make one's own experience in the field, at least, can help separating the good guys from the bad.

I enjoyed reading the Darvas book. It shows very well the journey every trader goes trough.
Another interesting book is The Perfect Stock by Brad Koteshwar. That book follows a number of fictional characters trading TASR during it's record run.

[QUOTE][INDENT]Nothing in the stock market happens without reason. And the folks with the money make things happen. And there is reason behind every move. The reason may or may not be obvious and in many cases it never becomes clear. Most of the times it does not become clear to even the most astute of observers. Should the astute observer figure out the reason behind any specific move, it is most times clear only in hindsight.

All participants in the market are human beings. There are no aliens or animal participants. It follows, therefore, everything that happens in the market is due to human action. Humans are the only buyers and sellers. The price settles at the end of the day at a level where all the buyers and the sellers for a particular stock come to a balanced agreement for a price for that day. What happens intraday is mainly noise.[/INDENT][/QUOTE]Only now there are also robot participants ;)