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Nicholas Darvas in his book "How I Made $2,000,000 In the Stock Market", published in 1986, created the Darvas Box Theory.
Nicholas Darvas explains in this book that the Darvas box theory is a momentum strategy that should be used with short-term timeframes (less than one year).
The Darvas box consists of several boxes, the upper line of the box is considered as a resistance, while the lower line of the box is considered as a support. The area between these two lines (inside the Darvas boxes) is an area of consolidation.
A simple breakout strategy consists of buying (cover) a stock if it closes above the Darvas box upper line and selling (short) it if the close price breaks below the bottom line. In a long system, the stop Loss is set at the bottom of the box, while in a short system, the stop loss is set at the top of the box. You can also use the previous Darvas boxes to set your stop loss.
The "How I Made $2,000,000 In the Stock Market" book does not talk only about technical analysis; In fact, the indicator author suggests using the Darvas Box trading indicator with some fundamental analysis rules. He recommended, for example, applying this indicator only to stocks in new and growing industries.
The Darvas box formula uses only the high and low time-series and the indicator function accepts two parameters.
In the first parameter, you should specify the period to be applied in the calculation. The period is used to calculate the highest high value of the security or stock.
In the second parameter, you should specify whether to display the upper or the lower line of the Darvas box (high low lines).
Here is formula to display the Darvas Box indicator in a chart:
Plot(DarvasBox(26, 1),"Upper Darvas Box",colorRed,chartLine,StyleSymbolNone);
Plot(DarvasBox(26, 0),"Lower Darvas Box",colorGreen,chartLine,StyleSymbolNone);
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