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Darvas boxes are dynamic trading range boxes that are based upon a state machine algorithm.
Though the calculations very involved, these boxes have two areas. The bottom part is a stop
loss area and the top part is the break out area. When prices break above the top of the box, it's a buy signal if the instrument was making new
12-month highs on high volume, allowing to stay long and add new positions as new boxes
developed. When the price of the stock dipped below the stop loss section of the box (a
percentage of the price, just below the bottom of the box), take profits and move on to something
else. In a nutshell one would buy the security when prices broke out of the top of the box on high
volume, typically only if the security was making a new 12-month high. If an existing position was
held, one would exit the security if the price fell below the stop loss area (the bottom of the box). Darvas boxes are drawn when certain conditions were met:
Usage: Once a box was constructed, Market entry is made when the price push through the top of the box. Position is held while the price is above the stop level. When subsequent boxes are made, the stop level is set to just below the bottom of the next box. The Darvas box uses several steps to identify a top and bottom, or acceptable trading range. The boxes are used to normalize a trend. A "buy" signal would be indicated when the price of the stock exceeds the top of the box. A "sell" signal would be indicated when the price of the stock falls below the bottom of the box. Darvas' original interpretation was to only buy when there was a pattern of boxes stacking on top of each other and to place the stop loss at the top of the previous box
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