How to Buy a Darvas Stock Breakout Before Volume Confirms It

by Darrin Donnelly on January 18, 2011

When a Darvas stock hits its buy point, we need to see heavy volume accompany the surge in order to CONFIRM the breakout. 

Vast studies have shown that a breakout has a much higher success rate if the price move is powered by volume that is at least 50% above the average daily volume for the stock.  This type of increased volume tells us that large buyers are behind the stock’s surge and the breakout is therefore more likely to be the start of a continued trend upward and not just an erratic one-day move.

This volume requirement raises a common question for traders: how should one handle a stock that hits its buy point, but hasn’t yet achieved the required volume?  For example, if our Darvas stock hits its buy point at 10 a.m. on volume of 200,000 shares, but we want to see volume of at least 500,000 shares to confirm the breakout, what should a trader do?

There are basically three ways to handle this dilemma – depending on how active you prefer to trade. 

The first option is to buy half of your intended position as soon as the stock hits its buy point and then add the other half later in the day, once the stock has met our volume requirements and managed to stay above its buy point.

The advantage to this first option is that you’re able to initiate your position right at the buy point without risking a full position in the event that the breakout fails (due to lower volume or the stock price dropping well below its buy point later in the day).

At the end of the day, if the stock HAS failed to reach the required volume levels or the stock price has fallen back below the breakout point, you can use your own judgment and decide whether to sell the half-position you established or simply hold the stock for another day or two to see how it reacts before adding the other half to your position.

The second option is to buy a full position only when the stock is PROJECTED to hit its required levels by the end of the day. 

How do we “project” the daily volume?  By simply comparing the stock’s volume at its current point in the day to its average volume for that point in the day. 

For instance, if we want to see our Darvas stock trade 500,000 shares on the day of its breakout and it’s already traded 200,000 shares in the first half-hour of the trading session, we can obviously assume that it is on pace to trade at least another 300,000 shares over the next six hours of the trading session.

If the projections end up wrong and volume does NOT meet our requirements by the end of the trading session, you could sell your position at the end of the day or cautiously watch how the stock does over the next couple days.

The final option is to simply wait to make ALL your purchases in the last half-hour of the trading day. 

This is the method I recommend to most traders, especially those who don’t have time to watch their stocks all day long or don’t want to pay the commissions associated with making several trades in a day.

By waiting until the final half-hour of trading, you’ll be able to see for certain if sufficient volume came in to confirm the breakout.   You’ll also be able to see if the stock held above its buy point, which is another sign of a strong breakout.

Yes, with this method you can and will miss a portion of the move by waiting so late in the day, but as Darvas traders, we’re looking for stocks that are going to give us gains of 30%, 50%, 100% and more.  Missing 1% or 2% of the move on the breakout day isn’t a huge price to pay if it means that we’re able to avoid more failing breakouts in the long run.

These three options are all helpful methods for buying a Darvas stock breakout before volume has confirmed the move.  Your own personal preferences and flexibility will determine the method that is best for you.

* All current Darvas stocks, with their exact buy points and volume requirements, are available RIGHT NOW in Darvas Trader PRO: the premium newsletter for Darvas System traders.

{ 0 comments… add one now }

Leave a Comment

{ 1 trackback }