CLASSIC TECHNIQUES
Modifying The Darvas Technique For Today's Markets
Something Darvas, Something New
by Daryl Guppy
In the May 2005 STOCKS & COMMODITIES, Daryl Guppy discussed
classic Darvas-style trading. Here, he modifies the technique to fit modern-day
markets, given that markets are more volatile these days than they were
in the 1960s.
The increased
volatility of modern-day trading has reduced the risk control elements
of the Darvas approach, which was originally developed and applied to less
volatile markets. The Darvas box and trailing-stop approach is designed
to keep you in a long-term steady trend, since the stop-loss level remains
unaltered for extended periods in the face of substantial price moves.
But in the volatile markets of today, this kind of strategy could expose
you to an unexpectedly high level of risk. To bring this classic trading
style into modern markets, I made four modifications. Each modification
is consistent with the underlying logic of the Darvas method.
MODERN DARVAS RULES
The new rules are shown in bold:
-
Trade is initiated by a new high for the rolling 12- or six-month period.
-
All entry decisions are based on the high of the price series.
-
All exit decisions are based on the close of the series.
-
Entry action is triggered by the first trade at the trigger price.
-
Exit action is managed on the day after the trigger close.
-
Action is triggered by the close.
-
Stop-loss calculation uses ghost boxes where necessary to handle modern
volatility.
The most significant change is using the close to initiate trade
entries and exits. Although this is only a minor change, it does substantially
increase the reliability of Darvas-style trading in modern markets.
Since the Darvas trading approach was developed in a market where high
volatility was unusual, the original approach used the bottom of the most
recent D_Box as a stop-loss point. The stop-loss point was only raised
after a new D_Box had been formed. The stop-loss is lifted upward on a
regular basis and does not lag far behind the current price action.
In modern markets, prices often move upward very quickly in a typical
momentum-driven sharp trend. There is no threat to the underlying trend
in this action, but the speed of the move is not adequately managed using
the Darvas stop-loss approach. To accommodate for this, I developed a "ghost"
D_Box (Figure 1).
FIGURE 1: BOX STACKING. Here, ghost D_Boxes are used as
a volatility stop-loss solution. Note how the trailing stops are based
on the height of the last box.
...Continued in the June issue of Technical Analysis of STOCKS
& COMMODITIES
Excerpted from an article originally published in the June 2005 issue
of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2005, Technical Analysis, Inc.
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