Definition – What does Darvas Box Theory mean?
The Darvas box theory is a trading strategy developed by a world famous ballroom dancer, Nicolas Darvas, in 1956. Darvas only looked at the stocks that were trading at new 52-week highs with correspondingly high trading volumes. A Darvas box is created when price of the stock goes above the previous high and then falls back to a price not far from that high. A box is then drawn around the high and low price. Forex traders have long experimented using the Darvas box theory in their trading. Traders using the theory are essentially momentum traders using a charted box for technical analysis rather than a trading range.
ForexTerms explains Darvas Box Theory
Darvas made his fortune using his boxes and pyramid patterns, but it was done during one of the most bullish markets in history. Although Darvas never sold short himself, he argued that the boxes would work in reverse. Darvas admitted that he chose to sit out on bear markets, causing skeptics to point out that his box theory may only produce irregular returns in extremely bullish market. The adaptation to forex isn’t perfect, but it follows a basic theory of staying with a trend until it clearly weakens.