If you are someone who would like to participate in the growth stories of companies, then this book is for you. Yes, you can make your millions, but they come only when you follow the process diligently, as Steve explains in this book.
Clicked by chance
Steve talks about how a dancer ‘Nicholas Darvas’ got into investing and made millions is quite interesting. Darvas was to receive 6000 shares of stock as a payment for his performance. Each stock was priced at 60 cents apiece when he received them.
To his amazement, the stock traded at 1.9 dollars when he checked the quoted price after four months. This is how his journey started when he wanted to understand how he made money by doing nothing.
Darvas did simple things that many traders miss doing.
1. Cut losses small.
2. Re-enter if the price moves again above the stop-loss price.
3. Buy when a higher high is broken.
4. Followed pyramiding.
5. Used trailing stop losses.
1. Followed tips
2. Subscribed to newsletters.
3. Being stubborn on a stock.
Comprehending the Game
Darvas, like many successful traders, was a trend trader and followed the trend. He kept it simple and made entries at the right time. He was an observer of human psychology through price action and volume. He would simply focus on the system and be clear from emotional meddling.
Darvas created a system that was free of emotions and based purely on human psychology. Every who wants to trade or invest will want to make a profit out of the investment.
For stocks, they work well when more investors and traders are willing to pay higher and higher. They do this by believing in a company's future earnings prospects.
Think like Darvas
Darvas never believed in bottom-fishing a stock to pick it at lows for great value for money. He always wanted to get into a stock that is in the growing industry, and there are outrageous earning expectations from it.
He says, “Your favorite time to buy a stock is when everyone that is holding it is sitting on a profit at an all-time high, and there is no one holding it with a loss waiting to break even.”
He would let the winners run and not close them prematurely. He would only sell a stock if it fails to stay in the topmost price range. He called it the stock’s price box.
Mantras Darvas believe in.
1. If you don’t make a trade or investment, you didn’t fail your system.
2. You fail when you don’t follow your predetermined system.
The Game Begins Here
Steve talks about how he made money using the Darvas system by trading in the 401K account. He did not let odd examples like Enron, General Motors, Lehman Brothers, or Bear Sterns from investing in his company. After all, he was using the Darvas system and buying only when the stock was making new highs.
Steve made his share of mistakes of not getting out when Nasdaq was at the 5000 psychological breakthrough point. That was the first red flag that was ignored.
He claims the main difficulty in trading and investing is not making profits but keeping them.
Steve says using the S&P500, 200-day simple moving average is one technique to buy above it and stay away from investments when it is below the 200 SMA. It is better than when you apply the buy-and-hold technique for your investments.
Some important points from the book hold good for patterns that are repeated.
Hot stocks have no resistance to going higher in Bull Markets.
Most stocks do not have solid low-price supports in Bear Markets.
Want to Trade Like Darvas?
Steve stressed the need to diligently follow the rules to be able to make money using the Darvas system. Discipline is the key to a trader’s success. Your system is only as good as a trader who follows it.
Darvas’s system expects you to buy when a stock is breaking new highs. This is counter to normal trader instincts to buy low and sell high. This is probably what everyone learns initially.
Stocks that are being bought by mutual funds and hedge funds in the bull market don’t allow you to enter. The key was that Darvas was a trend trader and bought into a stock's strengths.
He rightly says you have a huge advantage over the market when you make your decisions, when you are completely rational and when the market is closed.
Rules for the Game
Darvas had clear rules for the game. He was not only profitable with his system but was able to keep his profits. Not many people can keep their profits or cut when losses are small.
He was always on his toes when it came to cutting losses, if you can put it that way. He let the profits run and took a laid-back approach until the stock could not hold its highest levels.
Identify stocks trading to 52-week highs (This was an earlier all-time high)
Identify stocks that are at least double their 52-week low from their current 52-week high.
Back check to ensure that the current 52-week high is also the stock’s all-time high.
Look at charts or price histories to identify the price box they are in.
The stock needs to be trading on increasing volume over its past average volume.
Place a buy order just above the breakout price. Say the price box is between 90-95 dollars; you would set the buy price at 95.01 dollars and a stop loss at 94.99 dollars. If the stock is a pick from the Darvas box breakout stock, it should not come back below 95 dollars.
IF the stock performs correctly, you will trail it with a stop loss. Stop loss trailing will be from one price box to another.
Darvas was aggressive with positions when taking on breakout stocks. He was, however, very disciplined with a physical stop loss to cut losses quickly.
In the third book, Darvas recommends a maximum stop loss of 10% regardless of the price box.
The Darvas rules are principles that can be applied in all markets and time frames.
The Darvas system works best in Bull Markets. When followed diligently, more than earning you profits, the system helps you cut your losses when small.
You now have a system that can help you make the most of the Bull Market runs. Get your copy of the book to get insights into it all and Steve Burns trades.
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Guest Post - Written by Mr. Lal Bajaj, Bangalore
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