The Darvas Box Theory is a trading strategy developed by Nicolas Darvas that targets stocks using highs and volume as key indicators. The theory states that a stock is in an uptrend when it trades within a defined box and the volume of the stock increases each time the stock reaches new highs. Conversely, a stock is in a downtrend when it trades within a defined box and the volume of the stock decreases each time the stock reaches new lows.The Darvas box theory can be used to identify both long and short opportunities in the market.For example, if you are looking to go long on a particular stock, you would wait for that stock to trade within its defined uptrending box and then buy shares at or above the current high price. Conversely, if you are looking to go short on a particular stock, you would wait for that stock to trade with in its defined down trending box and then sell shares at order below the current low price.While there is no guarantee that any given trade will be successful, using this technique can help traders focus their attention on stocks with positive momentum and increasing volume levels.A downtrending box is essentially the opposite of an uptrending box. Whereas an uptrending box defines a price area in which a stock might be expected to experience rising prices, a downtrending box defines a price area in which a stock might be expected to experience falling prices.If the Darvas box theory is applied to a downtrending box in which the current price is below the lowest low of the previous four to five weeks, it is reasonable to assume that the current price will continue to fall. If the Darvas box theory is applied to an uptrending box in which the current price is above the highest high of the previous four to five weeks, it is reasonable to assume that the current price will continue to rise.As with uptrending boxes, a trader could use COT data or other indicators to help him identify potential downtrending and uptrending boxes. The trader can then wait for the stock to trade within that box and sell shares at a price below the low or buy shares at a price above the high.While there is no guarantee that any given trade will be successful, using this technique can help traders focus their attention on stocks with positive momentum and increasing volume levels.
