Steve Burns is living proof that you don’t have to stay glued to the ticker all day to make big money as a trader.
Like Nicolas Darvas himself, Burns didn’t wake up one morning and decide he was going to quit his day job and become a fulltime trader. In fact, Burns used a standard retirement account to trade his way to a $100,000 profit using the Darvas System. He also made an additional $50,000 profit by exercising his company stock options at the correct time, right before the stock price fell more than 50%. (He used the Darvas System to time this extremely profitable trade.)
Burns recently published a book called “How I Made Money Using the Nicolas Darvas System“ in which he explains exactly how he kept a fulltime job and still managed to make a quarter-million dollars trading with the Darvas method in off-hours.
In the following interview, Burns answers 10 questions for DarvasTrader.com and explains how he used the Darvas System to make and KEEP his fortune.
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Darrin Donnelly for Darvas Trader (DT): I understand that from 2003 to 2008, you made $150,000 using the Darvas System. That’s an incredible performance. But the first question other traders will want to know is: how much of that did you keep during the bear market that began in 2008?
Steve Burns (SB): I kept 100% of my gains from the 2003-2007 bull market through 2008. In my main 401K account, I went to cash equivalents on January 4th, 2008 and stayed there until 2009. I have been profitable every year for the past 8 years.
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DT: A LOT of people wish they could say they sidestepped the market crash, but very few people can. Why did you decide to exit the market when you did?
SB: Top stocks were falling out of their top Darvas price boxes.
Apple (AAPL) was my favorite and I traded it in late December and the first of January as it hit all-time highs at lower than normal volume. It broke $200 on December 31st, but by January 4th it was all the way down under $180 at double the normal volume.
Also, my company stock (DEG) had rocketed up 300% in four years and hit an all-time high of $104 in July 2007. It then failed. It tried to establish a top price box again in October, but could not get back to $100. It fell off a cliff on November 8th, dropping down to $78 on six times the average volume.
These were my two main trading stocks and it really set off alarm bells. I felt uncomfortable with my main workers not working.
Another one of my favorites I was in, Potash (POT), fell 20 points after earnings and that was it. I then put my brokerage account into cash along with my 401K money.
While Potash did recover to all-time highs, it had very wide and sloppy price boxes, I was not comfortable with it any longer.
Gamestop (GME) also topped out in early January to never recover to all-time highs.
Apple failed to make new highs again in April 2008.
My method is to trade the top Darvas price boxes of market leaders in up-trending bull markets. With my favorite stocks not in their top boxes, I was concerned.
On top of the individual stocks, the market itself, as measured by the Dow Jones Industrial Average and the S&P 500, was also no longer able to rally to new highs.
I went to cash.
I had heard some rumblings on CNBC about money withdrawing from stock mutual funds and some the mortgage market concerns, but had no idea about the market meltdown that would unfold that year.
Following the Darvas System, I just couldn’t keep trading my usual way and that’s how I knew it was time to exit.
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DT: That is great! You followed the Darvas System and let it tell you when to exit. No second-guessing or predicting. How did you first learn about Nicolas Darvas and his methods?
SB: I am an avid reader and book reviewer on Amazon.com and ran across the outrageous title “How I made $2,000,000 in the Stock Market” by Nicolas Darvas. I thought it was a gimmick book. But it kept coming up over and over as highly recommended and had numerous great reviews. So, I had to give it a chance.
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DT: I had an almost identical reaction when I was first introduced to the book 10 years ago. I thought, what kind of “get rich quick” scheme is this? I’m obviously very glad I actually sat down and read the book DESPITE the tile.
Did you experiment with other investing strategies before committing to the Darvas System?
SB: Yes, I tried buy and hold, day trading, swing trading, value investing, dividend investing, and CAN SLIM.
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DT: I’m smiling because I think ALL of us traders go through this same process. We have so many “light bulb” moments along the way, learning new systems. Until finally, we find the one that truly clicks with us.
What was it about the Darvas System that “felt right” to you as opposed to other, more traditional “buy-and-hold” type of investment strategies?
SB: In the year 2000, I had a $60,000 account that buy-and-hold investing turned into $29,000 by 2002. I promised myself that if I ever got my money back, I would never lose it all again during a market meltdown.
I liked the Darvas System because it was incredibly aggressive for profits – that is my style – but at the same time, it had a good stop-loss system where you got out with multiple small losses instead of riding the market down into a recession.
It is the best of both worlds; you get unlimited upside but stop your losses short.
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DT: Nicolas Darvas often made the point that he did his best trading when he was traveling overseas, with little day-to-day access to the stock market. Most people with day jobs are in a similar situation; they can’t watch the stock ticker all day long. Did having a day job help, hurt, or have little effect on you as a trader?
SB: Like Darvas, having a day job helped me. I would get a quote of my stocks early in the morning and then again in the last hour of trading. Working kept my mind off of the market and I just let the trends ride unless I had to take profits or losses.
My six-figure profits came easy because I was a pretty inactive trader. There were rarely any stressful decisions to make because I already knew what I was going to do based on price and volume. Working helped me to not overtrade by looking for action.
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DT: Let’s talk nuts-and-bolts trading. When looking for a stock to buy, what are you looking for?
SB: I am looking for:
1) A stock near all-time highs, or at least near 52-week highs after a bear market. It should have a nice support level for the price over the past eight weeks and be above its 10-day simple moving average.
2) A stock of a company that is literally profiting from changing the world. IPods taking over the music business, Blackberries or iPhones changing the cell phone market, Netflix bankrupting the traditional movie rental places, Amazon.com putting traditional book stores out of business.
3) Investors are anticipating huge earnings increases for the company. The company’s products are the most popular consumer products and really advertise the stock and bring in investors.
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DT: I can’t argue with any of those criteria.
I know we touched on this a bit earlier regarding your decision to exit the market when you did, but could you clarify for readers exactly how you decide to sell a stock?
SB: I sell if the stock falls below my original buy price because that shows me that either it does not have support – if I bought near support at the bottom of a price box – or that it was a false breakout – if I bought it when it broke out of a Darvas box.
I will also sell if a stock has had a nice run and makes new highs on less than average volume and fails to break out.
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DT: Had you not learned and implemented the Darvas System, where do you think you would you be right now, financially speaking?
SB: I would not have profited in my company stock, DEG, because it would have looked too risky at all-time highs, all the way from $28 to $104. That was the consensus of my coworkers; they thought I was crazy to actively trade it with half my 401k capital for five years. I had over 20% returns each year for those 5 years (2003-2007). (I also traded it again in 2010, when it broke into new 52-week highs, but I was stopped out and avoided the plunge it took again). I would have exercised my company stock options too soon, not allowing the profits to run.
I would have also stayed in the market of 2008 as it plunged. I’m sure I would have waited until I got so scared and then got out too late after huge losses. Then, I probably would have gotten back in way too soon as the Dow Jones industrial average fell another 3,000 points.
I would have had no clue of even what to do.
Fundamental valuations would have led me to believe that the meltdown in the entire market was impossible, but the Darvas System put me in cash early on and gave me very few buy signals as the Great Panic was in full swing.
Bottom line, I would probably have about $100,000 instead of $250,000 in my accounts.
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DT: That’s a pretty big difference!
What advice would you give to those who want to follow in your footsteps and make big money in the stock market?
SB: 1) Before you start, have a trading plan that has been shown to work.
2) Follow your plan, trust your buy signals and sell signals.
3) Know what kind of market you are trading in and adjust your risk accordingly. Are we in a bull or bear market? How much volatility are we seeing?
4) If you experience too much stress, you are trading too big or you are not confident in your plan.
5) Never quit learning.
6) Use DarvasTrader.com as a resource, I wish I would have had it when I started the Darvas System.
7) Never stop until you win big!
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DT: That is very kind of you to recommend DarvasTrader.com, I really appreciate it! All seven points are excellent!
I would add one more point for readers: go read Steve’s book, “How I Made Money Using the Darvas System.” It’s a fast read, purposely kept as simple as possible, so that even total newbies can understand it. And, it shows a real-life example of how you can use the Darvas System to make big money and truly change your life for the better.
Steve, it’s been a pleasure. Thank you very much for taking the time to chat with us.
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