The 5 Rules of Stock Trading in a “No Buy Zone”

by Darrin Donnelly on December 1, 2010

Click on chart to enlarge.

Click on chart to enlarge.

Perhaps you’re familiar with the military phrase: “no fly zone.”  It indicates an area in the sky where foreign aircraft are not allowed to fly through.  If they violate this “no fly zone,” they run the risk of being immediately shot down and destroyed.

Well, the stock market has a version of this called the “no buy zone” and it occurs when the overall market is under pressure.  If you buy stocks in a “no buy zone,” you run the risk of seeing those stocks shot down quickly, thus destroying your portfolio.

On Tuesday, November 16th, as reported in Darvas Trader PRO, the stock market officially entered a “no buy zone.” 

This happened when the NASDAQ logged its fifth distribution day in less than one month.  A “distribution day” occurs when the market declines (or “churns”) on increased volume. [click to continue…]

How to Set Stops and Protect Your Portfolio

by Darrin Donnelly on November 16, 2010

How to protect your money when a trade goes against you.

How to protect your money when a trade goes against you.

Before initiating a trade, you need to know what your “worst case scenario” stop will be. 

You have to have an answer to this question: “If this trade goes against me, where will I cut my losses and exit?”

Every successful trend trading strategy has a built-in initial stop rule for protecting your portfolio from heavy losses.  This rule simply states that no matter what, this is the MOST you can allow a position to go against you.  The Darvas System is no exception. 

One of the more popular initial stop rules comes from Investor’s Business Daily founder (and Nicolas Darvas fan) William O’Neil.  O’Neil advises readers to set an initial stop 8% below the buy point of every new stock purchase.  This means that, WITHOUT EXCEPTION, a stock should be sold if it falls 8% below the point where you bought it at. [click to continue…]

8 Lessons Traders Can Learn from Warren Buffett

by Darrin Donnelly on November 9, 2010

What can traders learn from Warren Buffett?

What can traders learn from Warren Buffett?

Warren Buffett’s investment philosophy and Nicolas Darvas’ are almost polar opposites of each other. 

Buffett buys companies with a timeframe of decades, not weeks or months.  He primarily buys older, established, “basic business” companies and avoids the latest rapid-growth companies. 

Where Buffett is perfectly fine with sitting through a deep, multi-year portfolio drawdown caused by a bear market, the Darvas trader exits positions quickly when the market declines and often takes short positions to profit from a bear market.

While I encourage traders to implement some type of long-term investment strategy to compliment their trading accounts (in fact, I compliment my trading with a systematic long-term approach based on the teachings of, you guessed it, Warren Buffett), there’s no doubt that the Darvas method is almost completely contrary to the strategy used by Warren Buffett.

Yet, there is actually a lot traders like us can learn from the master of value investing.

Here are eight principles epitomized by Warren Buffett that should also be embraced by successful traders. [click to continue…]

Understanding Darvas Boxes: When it’s OK to Break the Rules

by Darrin Donnelly on October 27, 2010

Click on chart to enlarge.

Click on chart to enlarge.

There are times when common sense adjustments have to prevail over set-in-stone rules. 

While following exact Darvas Box definitions for entering and exiting stocks does give you a sound trend-following strategy, to get the most out of the Darvas System you need to sometimes give your stocks a little extra leeway.

Nicolas Darvas himself did this when conditions warranted it.

A good example of a time to make exceptions to strict Darvas Box rules can be seen in the case of current Darvas stock: WYNN.

WYNN broke out of a $95.88-$85.72 Darvas Box on October 11th.  It then, technically, formed a new Darvas Box of $104.58-$99.81.  However, as was pointed out in the Darvas Trader PRO newsletter, that box was too short and shallow to use for establishing a new support level (exit point).  [click to continue…]

Market Remains in Clear Uptrend

by Darrin Donnelly on October 20, 2010

Click on chart to enlarge.

Click on chart to enlarge.

The markets sold off sharply on Tuesday, causing some traders to panic.  This panic wasn’t completely unreasonable as Tuesday’s session gave us a clear distribution day. 

A distribution day occurs when a major index declines on increasing heavy volume, signaling that institutions are selling.  Studies have shown that four or more distribution days within a period of about one month is a good indicator that the market is ready for a decline. 

Tuesday’s distribution day was the second for the NASDAQ in less than a month as the first one came back on September 30th.

Despite the distribution day we saw on Tuesday, it’s certainly not the time for Darvas traders to head for the exits.  One-day pullbacks on heavy volume are common in every bull market.  [click to continue…]

What, Exactly, IS a Darvas Stock?

by Darrin Donnelly on October 18, 2010

Nicolas Darvas searching for the next "Darvas stock."If you’re new to the Darvas System, you may be wondering what we mean here when we refer to a “Darvas” stock.

In general terms, Darvas stocks are market leaders.  Those high-flying, big-earning, fast-growing stocks that tend to lead market rallies.

In more specific terms, Darvas stocks share certain characteristics that the vast majority of publicly-traded companies do not.

To clarify those characteristics, I created an easy-to-remember acronym for the Darvas System: [click to continue…]