NICOLAS DARVAS AND HIS $2,000,000

icolas Darvas viewed Wall Street as nothing more than a gambling casino; therefore, he set out to learn how to gamble.

I would like us to take a look at Mr. Darvas’ understanding of the stock market, as outlined in his best selling book How I Made $2,000,000 In The Stock Market, originally penned in 1960, as we recognize that what was true over 50 years ago still holds true today.  In other words, trading the market today is THE SAME AS IT EVER WAS.

Mr. Darvas experienced an “important turning point” in his stock market career when he learned that “there is no such thing as cannot in the market.  Any stock can do anything.”  With this in mind Darvas developed his “box theory” based on the following realizations:

1.  There is no sure thing in the market.  I was bound to be wrong half the time. Darvas adopted what he called the “quick-loss weapon”.  He already knew he would be wrong quite often (half the time); therefore, he decided to accept his mistakes realistically and get out of a losing trade with a small loss.  “This way, I figured, I would never sleep with a loss.  If any of my stocks went below the price I thought they should, I would not own them when I went to bed that night.  I knew that many times I would be stopped out for the sake of a point just to see my stock climb up immediately after.  But I realized that this was not so important as stopping the big losses.  Besides, I could always buy back the stock by paying a higher price.”

2.  My pride and my ego would have to be subdued.  Darvas surmised that with a win ratio of 50% his profits had to be bigger than his losses.  Breaking even was not a sustainable option.  For that to happen he would have to take many losses while letting the winners run.  Egotistical pride would have to give way to humble reality.  “As if stocks were made to conform to my new attitude, I handled this quite successfully for quite a while.  I bought with bold confidence when I thought I was right and coldly, without a hurt ego, I took my limited losses when I thought I was proven wrong.”

3.  I must become an impartial diagnostician. Instead of trying to force his will upon market direction, Darvas allowed the market to direct him by becoming intimate with a few stocks at a time and by not listening to others.  “To try to fit the market into a rigid pattern was a mistake.  As I only handled five to eight stocks at a time, I automatically separated them from the confusing, jungle-like movement of the hundreds of stocks surrounding them.  I was influenced by nothing but the price of my stocks.  I could not hear what people said, but I could see what they did.  It was like a poker game in which I could not hear the betting, but I could see all the cards.  Of course, the poker players would try to mislead me with words, and they would not show me their cards.  But if I did not listen to their words, and constantly watched their cards, I could guess what they were doing.”

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This is how I worked it out-Nicolas Darvas

This is how I worked it out. I asked my brokers to send out their telegrams after Wall Street closing time, so they would reach me at 6 P.M. This is about the time I get up – the result of performing in nightclubs for many years. Meanwhile, during the day, the telephone operator is instructed not to let any calls through. In this way everything happens in Wall Street while I am in bed. I am sleeping while they are working, and they cannot reach me nor worry me. My delegate, the stop-loss order, represents me in case something unforeseen happens. – Nicolas Darvas

worked it out

Trading with the Tao

“The Tao” means different things to different people. It’s generally thought to have been introduced to the world sometime around 500 B.C. in China.  Since then, millions of interpretations have been contemplated. In modern times, everyone from the Dali Lama to Willie Nelson has offered their take on it.

What exactly is “The Tao?”

It’s usually translated directly as “the way” or “the path.”  But most who have studied it agree that it also refers to “the Source” behind everything.  The unseen force in the universe that essentially makes things happen.

A Christian theologian would probably see similarities between the Tao and the “Holy Spirit.”  Physicists likely see it represented as “energy.”  Self-help gurus often compare the Tao to “consciousness.”  Luke Skywalker called it “the Force.”  Had Michael Jordan delved into the world of metaphysics, he probably would have referred to the Tao as “the zone.”

The overriding message of the Tao is that you’re either flowing with it or against it.  You’re either in the zone or out of the zone, using the Force or blocking the Force. However you want to describe it, the point is that you feel good and peaceful when you’re flowing with the Tao and you feel bad and fearful when you’re trying to fight against it. (more…)

20 Wisdom Points from the Book ‘Superperformance Stocks’

If you read Jesse Livermore’s “How to Trade in Stocks” from 1940, Nicolas Darvas’s ‘How I made 2M in the stock market” from 1960, Richard Love’s “Superperformance Stocks” from 1977, William O’Neil’s early version of “How to make money in stocks” from the 1990s or Howard Lindzon’s “The Wallstrip Edge” from 2008, you will realize that after so many years, the main thing that has changed in the market is the names of the winning stocks. Everything else important – the catalysts, the cyclicality in sentiment, has remained the same.

Here are some incredible insights from Richard Love’s book ‘Superperformance Stocks’. In his eyes, a superperformance stock is one that has at least tripled within a two-year period.

1. The first consideration in buying stock is safety.

Safety is derived more from the good timing of the purchase and less from the financial strength of the company. The stocks of the nation’s largest and strongest corporations have dropped drastically during general stock market declines.

The best time to buy most stocks is when the market looks like a disaster. It is then that the risk is lowest and the potential rewards are highest.

2. All stocks are price-cyclical

For many years certain stocks have been considered to be cyclical; that is, the business of those companies rose and fell with the business cycle. It was also assumed that some industries and certain companies were noncyclical— little affected by the changes in business conditions. The attitude developed among investors that cyclical industries were to be avoided and that others, such as established growth companies, were to be favored. To a  certain extent this artificial division of companies into cyclical and noncyclical has been deceptive because although the earnings of some companies might be little affected by the business cycle the price of the stock is often as cyclical as that of companies strongly affected by the business cycle. Virtually all stocks are price-cyclical. Stocks that are not earnings-cyclical often have higher price/earnings ratios, and thus are susceptible to reactions when the primary trend of the market begins to decline. This can occur even during a period of increasing earnings.

3.  A Superb Company Does Not Necessarily Have a Superb Stock. There are no sure things in the market

There has been a considerable amount of investment advice over the years that has advocated buying quality. ”Stick to the blue chips,” it said, “and you won’t be hurt.” But the record reveals that an investor can be hurt severely if he buys a blue chip at the wrong time. And even if he does not lose financially, he usually has gained very little, particularly considering the risks he has taken. (more…)

How I Made $2,000,000 in the Stock Market by Nicolas Darvas

Excerpt: “Hungarian by birth, Nicolas Darvas trained as an economist at the University of Budapest. Reluctant to remain in Hungary until either the Nazis or the Soviets took over, he fled at the age of 23 with a forged exit visa and fifty pounds sterling to stave off hunger in Istanbul, Turkey. During his off hours as a dancer, he read some 200 books on the market and the great speculators, spending as much as eight hours a day studying. Darvas invested his money into a couple of stocks that had been hitting their 52-week high. He was utterly surprised that the stocks continued to rise and subsequently sold them to make a large profit. His main source of stock selection was Barron’s Magazine. At the age of 39, after accumulating his fortune, Darvas documented his techniques in the book, How I Made 2,000,000 in the Stock Market. The book describes his unique “Box System”, which he used to buy and sell stocks. Darvas’ book remains a classic stock market text to this day.”

How I Made $2,000,000 in the Stock Market by Nicolas Darvas
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Lessons of the Legendary Traders

What do the worlds best Trading masters differently than the average investor? Can the average investor learn from the Player Legends success stories and their techniques used? What do the most famous Players have in common that can be applied by the average talented trader?

Before we should give some insights on those questions lets have a look at some of the most successful Trade jockey Legends:

Nicolas Darvas turned an $ 36000 account into $ 2000000 in 18 months!!!
Ed Seykota, a Turtle Financier, turned $ 5’000 into $ 15’000’000 in 12 years!!!
Jesse Livermore made several multi-million USD fortunes in the early 1900’s
Richard Dennis, another Turtle Player, made between $ 100 and $ 200 000.000
George Soros is believed to be one of the greatest Trade jockey of all time!!!

The results are quite impressive and some different amazing Financiers should be added easily to the list above. Why do these guys have such tremendous results?

There are common factors, that can be observed through most of the successful Pitbull Legends:

They have a Strategy that they strictly follow.
Most of them have a trend-following average trading style.
Most of them have a mid- to long-term approach. Some of them burned their fingers over the preceding 3 years and some even lost a fortune. Here are some examples of observed behaviour patterns:

Losses are not slice early enough.
Investment with a short-term horizon become long-term horizon in hope of raising asking prices.
People listen to the advise of their invested $ Trade facilitators and Analysts.
People risk coin in hot issues recommended by colleagues of their colleagues.
People have no plan for their investments.
Money Management is not considered at all.
Greed and fear is omnipresent.

What can average talented trading insiders learn from the above and how can the mistakes listed above be avoided? The after key notches can be learned from some of the most successful Trading expert Legends:

Each investor has its own personality. Some of the investor have a very aggressive paper trading style and are stockmarket trading very frequently. Some prefer shares as different are increased risk oriented and speculate in contracts. Other players want only spend a minimum of effort. An investor need to reflect on his outline and choose a note trading approach that fits his personality.

A trade needs to be completely planned in advance. g. when they go on holiday, when they move house etc. But do they have a plan when they invest? An investor needs to have a method that helps him to be prepared for all scenarios of a exchange. One needs to know in advance when to buy, how much to buy, when to exit. Once a buy / sell is executed the bottom line of the instrument (stock, promise note, fixed interest paper etc.

The most important component of a stock trading method is Cash Management? Surprised? Lots of pitbulls and super traders spend most of their time developing a very advanced trade entry strategy. But the entry methodology contributes only approximately 15% to the success of a Note trading Method based on academic studies.
The most important question of a Paper trading Technique is how much to risk bucks and how many deals to trade at the same time.

A can do attitude is required to buy / sell successfully. Why? Because with phrases like it should be great, but I cant or one day perhaps I should succeed in the lottery, but until then I must work hard they have already lost.

Top 10 Trading Influences

If New Trader University had a campus this would be the professors:

Dan Zanger is a world record holding trader that taught me to use in the money stock options on the biggest monster stocks to amplify my returns with no added risk at key points. He is the king of chart patterns.

Alexander Elder taught me how the trader’s Mind, Method, and Money Management have to all work together for a trader to be successful.

Michael Covel showed me how the best trend following traders in the world win over the long term by simply following the trend. Finding the big trends is now my focus above all else.

Jesse Livermore knew how to make a fortune in bull and bear markets, in commodities or stocks. His only weakness was the management of the risk of ruin. He made some of the biggest fortunes in the history of trading and also blew up his account more times than other legends.

Nicolas Darvas showed me how to ride monster stocks 100 points farther than anyone else seemed to believe they could go. His lessons also showed me how to miss bear market draw downs.

Van Tharp‘s marble game on how to manage the risk of ruin was a game changer for me. Managing risk is really what determines a trader’s long term survival not stock picking.

William O’Neil showed me how to pick the real winning stocks based on historical models not opinions. He has studied what has really made money in the stock market historically better than anyone else I know. I get my stock watch list from his publication Investor’s Business Daily’s IBD 50.

Ed Seykota is truly a master trader and he has the returns to prove it. Mr. Seykota believes that a trader’s psychology determines a trader’s success more than any other factor.  I believe him.

Jack Schwager wrote “Market Wizards” and really got into the specific nuts and bolts of what makes them win.

Paul Tudor Jones I have picked up a lot of trading wisdom form his documentary, quotes, and interview. He is truly one of the greatest  traders of our time.

If you decide to study these great traders keep what actually makes you money in the long term and discard what does not.

Nicolas Darvas

Great links with Nicolas Darvas interviews

“Since he has to do trading from wherever he is dancing he ignores tips, financial stories and brokers’ letters, and has never been in a broker’s office. Basically, his approach is that of a chartist: he watches price and volume … When a stock makes a good advance on strong volume, he begins watching it, buys when he feels that informed buyers are getting in. For example, when he was playing in Calcutta, he noticed E. L. Bruce moving up in the stock tables. Suddenly, on 35,000 shares it moved from 16 to 50. He bought in at 51, though he knew nothing about the company, and ‘I didn’t care what they made.’ (They make hardwood flooring.) He sold out at 171 six weeks later.

Darvas places his buy orders for levels that he considers breakout points on the upside. At the same time, he places a stop-loss sell order just below his buy order, so that if the stock does not move straight up after he buys, he will be sold out and his loss cut. ‘I have no ego in the stock market,’ he says. ‘If I make a mistake I admit it immediately and get out fast.’ Darvas thinks his system is the height of conservatism … If he has a big profit in a stock, he puts the stop-loss order just below the level at which a sliding stock should meet support. He bought Universal Controls at 18, sold it at 83 on the way down after it had hit 102.

Darvas trained for the market just as methodically as he had studied his dancing, read some 200 books on the market and the great speculators, spent eight hours a day until saturated. Two of the books he rereads almost every week: Humphrey Neill’s Tape Reading and Market Tactics and G. M. Loeb’s The Battle for Investment Survival. He still spends about two hours a day on his stock tables.”

That line, “[He] buys when he feels that informed buyers are getting in,” made me chuckle. It should read “He buys when he suspects that uninformed fools are piling in.”

An Interview With Nicolas Darvas in 1974:

Don’t forget I too went through a period of learning from 1953 to 1958 where I lost a substantial amount of capital before I worked out what worked and then was lucky enough to time it in the 1958-1960 bull market.”


Trading Lessons From Nicolas Darvas

Nicolas DarvasNicolas Darvas has inspired traders for many generations. His book, “How I Made 2,000,000 in the Stock Market” is one that you’ll find on many recommended reading lists including my own. While some have argued that much of Darvas’ success had to do with lucky timing, his books are still widely read and for good reason.

A lot of traders can identify easily with Darvas because he went through the process of learning how to trade much like most people do today. Darvas began by first looking for the “secret” to the market. And, just like all of us have found, after finding no success from trading on the stock tips of others including brokers and expensive newsletters, Darvas figured out that he ultimately had to develop a trading system on his own. He accomplished that feat by committing himself to years of study of the market and from learning from his own mistakes. His determination, perseverance, and constant self-evaluation offers an excellent model for all traders to follow.

In continuing a series of posts where I share my notes I’ve taken (and refer to from time to time) after reading the books and methods of others, here are some things you may find of interest about Nicolas Darvas and his approach:

Trading Lessons From Nicolas Darvas:

  • There are no good or bad stocks. There are only stocks that rise in price and stocks that decline in price, and that price is based on the laws of supply and demand in the marketplace
  • “You can never go broke taking a profit” is bad advice that will result in overtrading and cutting winners short. Selling winners and holding losers is to be avoided at all times (more…)

Trading Book Review Of the Week: The Three Skills of Top Trading

This book is written about how three mutually reinforcing skills make a complete trader.

1). Pattern Recognition and Discretionary Trading.

Using the Wyckoff method you will see chart representations of how hot growth stocks are accumulated in bases for long periods of time. They eventually have pull backs then break out to new highs and trend. You will also see how they eventually have exhaustion tops on high volume that fail to rally and they begin to break down in distribution with lower lows and lower highs. The author encourages discretionary trading through experience by being able to identify market action through the models from past stocks. This work ties in nicely with the school of thought from legendary traders William J. O’Neil, Jesse Livermore, and Nicolas Darvas.

2). Behavioral finance and systems building.

The book teaches that readers must be flexible in their trading. We are merely a ship on a sea of market participant opinions. Follow the prevailing sentiment during the middle of the the trend, and go contrary to it at the extreme tops and bottoms. Hope, fear, and greed are the dangers and the movers of the market that cause support and resistance,  trends, and chart patterns. The action of the stock market is nothing more than a manifestation of mass crowd psychology in action. The Pruden model shows a chart of how accumulation, mark-up, distribution, and markdown works in the market tied to price, volume, sentiment, and time. It truly explains how the price pattern and charts in growth stocks generally play out historically. (more…)

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