Darvas box theory, developed by Nicolas Darvas, is a momentum strategy that combines market momentum theory with technical analysis to determine optimal entry and exit points in the stock market. Let’s delve into the details:

What Is Darvas Box Theory ?


Darvas box theory targets stocks using highs and volume as key indicators.
The technique involves:
Buying stocks that are trading at new highs.
Drawing a box around the recent highs and lows to establish an entry point and placement of the stop-loss order.
A stock is considered to be in a Darvas box when the price action:
Rises above the previous high.
Falls back to a price not far from that high.


How Does It Work?
Darvas boxes are created by drawing a line along the recent highs and recent lows of the time period the trader is using.
The theory works best in a rising market and/or by targeting bullish sectors.
Traders focus on growth industries that are expected to outperform the overall market.
Darvas used volume as the main indication for strong moves.
Once an unusual volume is noticed, a Darvas box is created:
The box has a narrow price range based on recent highs and lows.
Inside the box, the stock’s low represents the floor, and the highs create the ceiling.
When the stock breaks through the ceiling of the current box, traders:
Buy the stock.
Use the ceiling of the breached box as the stop-loss for the position.
As more boxes are breached, traders can add to the trade and adjust stop-loss orders.


Fundamental Analysis in Darvas Box Theory:
While largely technical, Darvas box theory originally mixed in some fundamental analysis:
Targeting industries with the greatest potential for exciting investors and consumers with revolutionary products.
Preferring companies with strong earnings, especially during choppy market conditions.
In summary, Darvas box theory is a powerful tool for traders seeking momentum-based entry and exit points, especially in rising markets and bullish sectors.

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Always allow some wiggle room, look at support and resistance as an area not a strict level as u may be whipsawed.