As an investment analyst, I spend a great deal of time studying the classics in the field. For instance, I read Warren Buffett’s annual letters to the shareholders of Berkshire Hathaway (NYSE: BRK-B) and the books of his mentor, Benjamin Graham.

There are also books by Peter Lynch, Burton Malkiel, Robert Shiller, and other great investors that I consider to be must-reads.

Some of the investing classics are both useful and entertaining. On the list of books I think every investor should read are Edwin Lefevre’s “Reminiscences of a Stock Operator” and Nicolas Darvas’ “How I Made $2,000,000 in the Stock Market.”

The Hungarian Dancer Who Traded His Way To $2 Million

Darvas is one of those unique success stories. He was a young economist who fled from Hungary in 1943 to find a better life in the west. Within a few years, he was a professional ballroom dancer touring Europe and the United States with his sister as the “Darvas and Julia” dance team.

While he was touring the world, Darvas was also trading stocks. He wrote about his stock-picking strategy in the 1960 book, “How I Made $2,000,000 in the Stock Market.” The book explains how he started with just under $37,000 and grew his account to more than $2.25 million in a three-year period.

This book tells an interesting story. Darvas used information sources that some investors would laugh at today. He relied on Barron’s weekly newspaper and telegrams from his broker to make his trading decisions. Darvas would probably laugh at some modern-day traders, wondering why they need data updated in nanoseconds when he was able to find success with weekly charts.

Every Saturday, when his copy of Barron’s was delivered, he would look for stocks with unusually high volume. When he found one, he would ask his broker to send a daily telegram with the stock’s price quote.

Using the telegrams, Darvas created daily charts that would become the most famous part of his strategy — the Darvas Box.

The box was formed after prices reached a new high and then pulled back. Darvas used 52-week highs, but it’s possible to use new 13-week highs or even new two-hour highs to trade shorter time frames. The new high formed the top of the box, and the low during the pullback formed the bottom of the box. When prices moved above the top of the box, Darvas bought. He used the bottom of the box as the stop-loss level.

The chart below shows how Darvas Boxes can be traded. The stop is raised every time a new box forms. This strategy allows traders to stay with the trend. Darvas Boxes also show traders when to get back into the market after being stopped out of a position.

Closing Thoughts

Now, Darvas wasn’t always right. But he didn’t have to be right all the time. What made his strategy successful is that he was able to ride the trend. By maintaining stop-losses and pouring more money into what was working, while cutting losers, he was able to ensure that his winners were a lot bigger than his losers.

It’s straight out of the momentum investing playbook (something my colleague Jimmy Butts and his Maximum Profit readers know a little something about.)

Like Darvas, I turn to the charts to find the right time to buy. Rather than using a box, I follow my award-winning ITV indicator, along with a host of other unique tools. My own approach incorporates ideas that I have collected from some of the greatest investment minds. I combine the fundamental approach of investors like Buffett and Lynch with chart analysis from technical analysts like Darvas and others.

The point is, trading strategies like the one Darvas created show there are multiple paths to success in the investment world. If anything, investors and traders alike would be wise to take a cue from Darvas and adopt some sort of stop-loss strategy.

There’s also the time-proven methodologies of my colleague Jim Pearce… As the chief investment strategist of Personal Finance, Jim has a knack for making trades that produce exponential gains, under any underlying conditions. And now, we’re giving investors even more…

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