Nicolas Darvas – The Dancing Trader!

Hello World,

As mentioned in my last blog, this post is all about the one book that has helped me gain perspective on how I want to go about the business of trading. The book is How I Made $2 Million in the Stock Market” by Nicolas Darvas, which was first published in 1960.

The book that left a mark!

The book is all about Darvas’ journey between November 1952 and May 1959, a period during which he got introduced, hooked, gambled, screwed up, got lucky, recovered, studied and rose above his limitations to make $2.25 MN in the American stock market!

Who was Nicolas Darvas?

Many of you who have been pursuing and researching on stock trading would have heard of Nicolas Darvas, his Box Theory and his exploits in the market.

Nicolas Darvas – The Dancing Trader!

For the uninitiated, Darvas was one half of one of the best dancing duo of the 1950s. He toured the entire world with his dancing partner and half-sister Julia. And while at it, he figured out a way to make money from the stock market by being an active trader.

Just to remind you again, this is the 1950s we are talking about. A time when there was no internet or computers with personal terminals or tons of indicators or charting options like today. His trading happened solely through brokers with whom he connected via telegrams.

His only information source, while he was on tour was Barron’s, a weekly financial publication from New York, which was shipped out by his broker on every Monday to wherever he was. Once he returned from his tour, Darvas relied on Wall Street closing price from newspapers to decide on his trades.

Please take a moment to appreciate the genius of this guy! 

How did I get to know about Darvas and his book?

I came across this book for the first time on Amazon, while looking for trading books that would help me learn more. But I promptly dismissed it just because of the title.

I mean, for the marketer in me, the title sounded like a classic click bait!

Four months later, I came across it for the second time on a trading podcast. It was a YouTube channel that I was (& am) addicted to called Chat with Traders, run by an amazing host named Aaron Fifield. Aaron interviews top traders from all over the Western World, picking their brain on different aspects of trading. His podcasts are very detailed and usually filled with tons of personal experiences, anecdotes, insights and best practices from the interviewees.

Anyway, hearing this book being recommended by a very reputed trader made me sit up and research on it. The premise of it is the story of a dancer trading while on world tours in the ’50s was enough to pique my curiosity.  

Interesting! But how is it as a read?

I am a self-confessed sucker for an underdog story. Watching “The Mighty Ducks” with my elder sister sometime in the late ’90s is one of my first and favorite memories of a true blue underdog story.

I mean what is not to like about an outsider, not given much of a chance by anyone, moving out of his/her comfort zone, fighting against all odds and succeeding?  It has a certain kind of romance to it, which fills me with hope and happiness. 

And that is what Darvas’ story is all about!

A dancer, who comes across the stock market by chance, gets hooked on and makes all the mistakes that a newbie can make only to realize that the true way out is to learn and equip himself. He puts in the hard yards, reading over 200 books and at times up to 8 hours every day, and in the process makes newer and bigger mistakes with everything he owned at stake. He loses almost all of it and right at the precipice of no hope, enlightenment strikes as a result of the countless hours of effort he put in helping him find his feet and eventual success.

Even if I keep my interest in trading aside, “How I made $2 Million in the Stock Market” is a fascinating read.

OK! So what is my biggest take away from this?

Most of the folks use this book to dissect and build upon Darvas’ “Box Theory,” which is primarily a trend following method he developed via his learning from the market.

Many people believe that the box theory can work in today’s market with certain tweaks. Many say that it doesn’t. Some say he lied through the records to fabricate this story to get fame and money via his books.

I am not wise enough to agree or disagree on whether this works in today’s market. The controversy is irrelevant and above all, the “Box Theory” is not my biggest take away from this little read.  

My biggest take away is his journey in itself. His evolution as a trader!

It simply fascinates me.

I have tried to infer and depict different phases of his trading journey in the below diagram:

The way he moved from a beginner to intermediary to a master in the field in a span of six and a half years, while doing a full time gig is just amazingly awesome. Please note that here mastery is not defined as “knowing everything” about stock trading. Mastery in this context is defined as finding an edge or system that works and making money using it.

Darvas definitely got that right!

Below is a break down of his characteristics at different skill levels.

Beginner Phase

Darvas began, like most beginners, represented by a mindset where:

  • He thought that he was natural at this and took it for granted that this was easy
  • He had a bit of beginners luck which gave him a misplaced self-confidence
  • He had zero knowledge and depended on tips and recommendations to enter a trade
  • He had 25-30 trades running in parallel at any point in time and found it difficult to keep track of it
  • Most of his trades turned against him the moment he entered and reversed when he exited
  • He was happy with small wins and falsely justified big mistakes
  • Every time he analyzed his P&L, which was far and few in between, he realized something was not right

Intermediary Phase

He moved into the intermediary phase after he started acknowledging the need to learn and began putting in solid effort into it. It took a long while but came none the less. This phase consisted of:

  • Going the fundamental way first. He implemented a strategy that backfired, putting almost all of his earnings in jeopardy. He understood that to succeed through the fundamental method, one needed to have inside news, which wasn’t available for retail investors.
  • He identified technical trading as the form that suited him the best.
  • He accelerated his learning process. As mentioned earlier, he spent up to 8 hours every day and read over 200 books during this period to learn and understand the market dynamics and price action in relation to traded volumes.
  • He identified his edge in price action and formed his own trading approach – The Box Theory, a result of the learning effort.
  • He figured out that in order to succeed, he should not let his losses run long or cut his profits short. As a result, he started employing trailing stop loss, which ended up being his biggest weapon insuring against market uncertainties.

Mastery Phase

This was the phase during which he made most of his money. He had clearly defined objectives and means to achieve it. Keeping that as the core, he established a set of trading rules that was not to be compromised upon.

He then kept practicing his theory waiting for the right stock to arrive. Once he found the stock, he kept running with it, increasing his position size at each positive signal until it weakened and went against the rules.

The fact that the majority of his $2.25 MN came from trading just 5 shares shows how patient and disciplined he was with his entire process.

Lessons from Darvas’ Journey in the Market

  • Never rely on anyone’s advice. Spend time and effort in learning about stock market. Form a trading plan or process you are comfortable with based on your learning and stick to it.
  • Work while the market sleeps. Relax when the market works. There is no point having your heart in your hand staring at the screen. It is a different matter if that gives you the kicks but most people are not wired like that. Objective of trading is to make money while treating it as any other job. Not to get emotionally invested and subsequently wrecked.
  • Don’t over complicate things. It leads to confusion and indecision. 
  • Market is not predictable. So insure yourself against the uncertainty
  • Each stock has a personality. As you can’t get along with everyone around you because of personality clashes, you can’t work with stocks of certain characteristics just because they don’t match with your aptitude. Understand, acknowledge and move on. This is not an ego tussle.
  • Never trade against the market trend. Chances of reaching the shore alive while swimming against the tide is bleak.
  • Never give up. Keep at it. You will make mistakes, but that will only make you wiser .

How it helped me?

A lot of us don’t even take the first step on seeing if we have an aptitude for trading because of preconceived notions.

A lot of us don’t get into trading thinking we have a full-time job and won’t be able to devote time while at the office. 

A lot of us began trading and got so scarred emotionally that we decided to just run away.

I was there for a while and found it difficult to deal with it, especially the emotional scarring. 

But Darvas has left an impression on me. He showed me that it is normal and even the best struggle with it. He showed me that it is possible to be involved without being involved. To have a full-time job and yet be active in the market.

You just need to find where the heart is and be open to putting in the effort to follow it up.

And for that, I am thankful to Darvas. Hope you will enjoy his journey too!

Since I mentioned that Darvas’ Box Theory was a trend following method, my next blog will be an introduction to different trends in the market. 

So until then, Cheers


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