Another Darvas Story – this time it’s Out Of The Box
Nahalungkat ko ito sa aking baul, alam ko na noon pa man ay mahal na mahal ko na si Mang Kulas (Nicholas Darvas).
Last year, when I decided to study the Technical Analysis of the ZFT System, I started stalking all ZFT personalities I could find. I started asking them questions as a part of my quest to learning.
A lot of them were kind enough to respond to my questions, they look silly to me now, but back then those silly questions are the only thing I knew about Technical Analysis. One of the kind ZFTs assigned me to read a book about Nicholas Darvas and make a review within seven days, I was hesitant at first because I already read this book and I found it boring…
But then, I knew that if I wanted to continue this quest of mine I had to comply… So I did, and then…
The Magic Happened.
Below is the exact recount of the task and my review, to keep the authenticity of a novice’ amazement I did not alter any of the content.
Assignment: To read the book How I Made $2,000,000 in the Stock Market by Nicholas Darvas
ZFT Mentor: (excluded because I was sworn to secrecy)
Date Assigned: November 19, 2017
Deadline: November 26, 2017
To read the book 2 to 3 times and then answer the questions listed below. Type answers in word and send it on or before the deadline:
- What were the similarities that Mr. Darvas experienced as a newbie trader that you also experience at present time?
- What were his mistakes?
- When Mr. Darvas thought that the mysterious moves in individual stocks usually coincides with violent move in the general market.
- Mostly similar to the written as answers to Number 1 question, which I copied again here:
- What were his turning points or AHA moments before he became a profitable trader?
- When he bought his second profitable stock after his biggest loss, it was then that he realized that it was because it was purely based on the price action in the market.
- When he figured out that if there is a fundamental change in a stock it will soon show up in the price and volume.
- When he realized that, after developing the box theory:
- There is no sure thing in the market – he was bound to be wrong most of the time.
- He must accept this fact and readjust himself accordingly – his price and ego would have to be subdued.
- He must become an impartial diagnostician, who does not identify himself with any theory or stock.
- He cannot take chances, he has to reduce risks to the lowest possible.
- What did you realize from the story of Mr. Darvas?
- Keeping a record is important, this when he knew he was losing.
- When buying and selling stocks, write down the reason why.
- When you cut loss write down the reason and try not to repeat the same mistake.
- That you can go broke by constantly trying to take a profit on an uptrending stock rather than holding it while riding the uptrend.
- I always hear it in stock groups or in FB that when you get a loss, your so-called mentor or stock trading peers will say to you “okay lang yan, small tuition fee to pay to learn how to trade” until it becomes normal that I, too, am telling the newer ones the same. But Mr. Darvas and the other expert traders like ZFTs for instance have already suffered this same fate and learned from it so that we don’t have to. Sacrificial lambs as you may call them, so we just have to take advantage of what they learned from their mistakes, we have to study what they learned so that we do not have to suffer the same fate. But most of us, and I’m super guilty of this, too, we just go and enter the market without the proper ammunition for it. There’s a lot of free training courses out there, ZF’s blog being the most comprehensible one with visual samples, what more could we ask for? We don’t have any excuse! I don’t have any excuse! I will no longer make up excuses!
- I can learn a lot from the rules that Mr. Darvas concocted after experiencing ups and downs in the market:
- I should not follow advisor services. They are not infallible, either in Canada or on Wall Street.
- I should be cautious with brokers’ advice. They can be wrong.
- I should ignore Wall Street sayings, no matter how ancient and revered.
- I should not trade “over the counter” –only in listed stocks where there is always a buyer when I want to sell.
- I should not listen to rumors, no matter how well-founded they may appear.
- The fundamental approach worked better for me than gambling. I should study it.
- AND THE HOLY GRAIL: I should rather hold on to one rising sotck for a longer period than juggle with a dozen stocks for a short period at a time.
- None of these works: gambling, tips, information, research, investigation.
- Ignore all rumors, tips or fundamental information, do not concern yourself with the reasons behind a stock price’s rise. Purely technical approach to the market is sound. By studying price action and volume, discarding all factors will give positive results.
- A good technical lesson on how to detect a rising stock: if a usually inactive stock suddenly becomes active, and if the price rises, add it to your watchlist.
- Back testing is a key factor to successfully trade a stock.
- Always trade UPTRENDS!
- The BOX Theory: When the boxes stood, like a pyramid, on top of each other and the stock was in the hightest box, add to your watchlist! It could bounce between the top and the bottom of the box. A healthy lively stock would do what it likes, bounce or any movement as long as it’s inside the box. If it is lively stock within a box, it would rise dynamically. Example:
- In this example, Darvas compared the prices into a dancer that leaps into the then goes into a crouch to set himself for the spring. Just like the example in the figure above, a stock in an UPTREND that retraced to 45 after reaching 50 is consolidating or preparing to spring up to its next upper box. Otherwise, if it breaks down from 45 you have to sell or cut your position as it will now create a lower box and might have a reverse effect as of that spring up.
- In studying this theory, Mr. Darvas also learned that the ranging inside the box shakes out the weak hands which enables the stock to spring up more rapidly.
- Another example: 50 – 52 – 57 – 58 – 60 – 55 – 52 – 56 = new upper box range is 52-60
- Another example: 58 – 61 – 66 – 70 – 66 – 63 – 66 = new upper box range is 63-70
- The right time to ENTER: when it enters a new higher box!
- There is no sure thing in the market, you are bound to be wrong half of the time.
- Manage your emotions – your pride and ego must be subdued, you should have a cold unemotional attitude toward stocks, do not fall in love with stocks. SELF DISCIPLINE!
- There are no good or bad stocks, there are only rising or falling stocks. Hold the rising stock, sell the falling stock.
- If you are wrong, sell immediately with a small loss.
- You can always buy back a stock at higher price if it goes inside the upper box.
- PROFITS must be bigger than you LOSSES!
- Discipline yourself to hold on a rising stock and not to sell too quickly.
- On a rising stock, always set a Trail Stop.
- On taking profits, accept that you will not be able to sell at the top. Sell on your trail stops, or when the boxes begin to reverse.
- Learn from Mr. Darvas’ Objectives:
- Right Stocks
- Right Timing – buy on breakout of box, add more on next breakout of box
- Small Losses – cut loss on breakdown of box
- Big Profits
- Learn from Mr. Darvas’ Weapons:
- Price and volume
- Box theory
- Automatic buy-order (This won’t work in COL, so follow ZFT xxx advice, observe and buy between 11:30am to 12:00pm and 3:00pm to 3:15pm.
- Stop loss – Trail stop and box reversal
- When the trend reverses going to a downtrend – RUN LIKE A THIEF!
- If it becomes your passion, nothing can go in the way, nothing is impossible. This was shown during his difficulty of getting stock quotes when he was travelling around the world.
- Have only few stocks in your port, it would be easier to manage and will cost lesser in fees.
- Each stock behaves differently.
- Distance yourself from rumors, try your very best not to get hyped, just stick to your setup stick to your plan.
- When you make a big killing, be more cautious not to lose it by a wrong move, again just stick to your setup stick to your plan. I also always read that “What Miss Market gives you Miss Market can also take in a snap.”
- + First time to hear the term “Pilot Buy”, I think I will change my “1st Tranche” title in my journal with this one, it sounds really cool 😊
- When the guy realized that he just earned profits more than he could’ve imagined he could get in the stock market he did not barge, he stayed put, he kept on holding to his uptrend stock. Just how Kap says it “if a stock is in an uptrend it’s gonna go up foreveeerrrr”. Another lesson I learned in this part is that if your dreams come true it’s time to dream another dream – it’s time to dream bigger!
- Being over confident is the most dangerous trait to have in the stock market. Having a big ego can spell disaster, the market can beat you this way.
- Going in and out of the market without a plan, is deadly!
- During a bear market look for outliers. It is okay to be a techno-fundamentalist during bear market for capital gain.
- Buy high and sell higher.
- Follow the leaders.
- Never ever have a Get-Rich-Quick mind set! This will not bring good to anything.
- Lastly, NEVER GIVE UP! Reading the first chapter of the book to the last, I saw how Mr. Darvas has lost numerous times, how he experienced a personal crisis, how his emotions crashed, but the stock market just like his dancing became his passion. “I was so desperate. I did not know what to do. I felt I could not go on. Yet I had to go on. I must save my property. I must find a way to recoup my losses.” And so, I WILL NEVER GIVE UP!
- I’ve read this book before, but it’s funny that when I read it now I feel different – I feel like it’s talking to me, as if Mr. Darvas knows me, as if Mr. Darvas was writing about my trading journey. I’ve just finished rereading the first chapter with teary-eyes and giggles here and there, at this early stage I can already answer question number 1: What were the similarities that Mr. Darvas experienced as a newbie trader that you also experience at present time?
+ Mr. Darvas, like most of us beginners, was working while trading. He was similar to an OFW like us, he was trading miles away from the market.
+ Written in the chapter of The Gambler, Mr. Darvas seemed to have the SUPERMAN SYNDROME after the very first stock he ever bought gained 380%. So he continued to buy and sell stocks feeling like a big businessman, a big stock operator – like a gambler. I was all these.
+ After the first problem, which he did not yet realize at that time, he reinvested his money from stock picks which he got from different people that he believed had better knowledge in stock market than him. He used TSISMIS ANALYSIS to buy his stocks.
+ He was an optimistic, clueless retail stock buyer who plunges in and out of the market. Well, at this point, I think Mr. Darvas has really written this book for me – if not about me. Hahaha!
+ As a new investor, he was also captivated by the dividends offered by long-term stocks. A familiar-sounding strategy as I also began as an “investor” choosing fundamentally sound stocks from the index list that were recommended by the Truly Rich Club, and later I heavily relied on Col Financial’s Investment Guide choosing from the ‘Buy Below’ priced stocks.
+ Mr. Darvas was quick to buy bulk shares from any stock tips he gets and then sell it at a loss.
+ There was also a time that he thought he made a quick buck with small profits not realizing this would turn into a loss due to brokerage fees. He was excited with small gains and he was swift to overlook his losses, sort of manhid with his losses… Oh my gosh! This is so me!
+ Sometimes he was emotionally attached to his stocks which for him had sentimental values.
+ His record transactions looked like a trading record of a small-scale stock exchange. Hahah! I surely remember having 12 to 20 Blue Chips in my portfolio and a Watchlist Porfolio just a few weeks ago.
+ Just like me, sometimes he would buy on news.
+ I always read in the market that 99% of traders will most likely to lose money in the stock market, well that speaks for me and Mr. Darvas who was losing money every week, it was his first and worst dilemma.
+ Hahaha! And hahahahah again! Seems like paying subscription fees for stock picks was already rampant back in the days.
+ He thought that “when to enter the market” was an insoluble problem, I thought so, too.
+ The Facebook groups such as TAP and other groups I’ve joined to get “advise” can also be compared to what Mr. Darvas thought as his small elite circle – his broker, his financial adviser and the subscription papers he relied heavily on to for a so-called “professional tips”.
+ In the next chapter, The Fundamentalist, Mr. Darvas describes how he felt when he was first offered to open a brokerage account, he felt that he was becoming part of the financial scene. This brings back the memories of my first time to step into COL Financial office to open my account. Tall building, elevators, people coming in wearing suits, though my initial deposit was only PHP 25,000 I felt vibrant! Like WOW! I’m a stock market investor! It was a dream come true! I’m going to be a shareholder of a corporation, I will be a co-owner of Jollibee! Wiiiiiiiiiii!
+ When Mr. Darvas had a series of fortunate trades, he was convinced that he was a natural in Wall Street. Clearly like how I felt when my Blue Chips started earning, only to learn in the future that most index stocks were rising because of the Bull Market.
+ “Whenever a trade was successful I praised myself.” Uh-oh, I would even occasionally brag about it to my partner and to a friend, hahahaha!
+ “If I saw a new stock I wanted to have it. I reached out for fresh stocks like a child for new toys.” – This is me during my IPO-clenching days. Hahahaha!
+ ”If I did not conduct at least one transaction a day I did not feel I was fulfilling my role in the market.” – Yeah, this is me for 5 months now since I started trading continuously for more than 2 months, when I started getting addicted to trading.
+ Mr. Darvas, like most newbie investors in the PSE as myself, previously liked buying cheap hoping to sell high. He also bought illiquid stocks as long as they were cheap, and so he thought – and so I thought.
+ Following big institutions, I remember in one stock group we call these “whales”, if they buy we buy if they sell we sell.
+ “I was so desperate. I did not know what to do. I felt I could not go on. Yet I had to go on. I must save my property. I must find a way to recoup my losses.” This is my current situation, except I do not need to save my property but I have to save my hard-earned savings, my savings from my hard work from 24-hour shifts, from working on weekends, from emotional distress, and from having to leave your family to work abroad.
+ When Mr. Darvas joined an office filled with the wrong crowd and started to throw away his system, is like how I see my current situation where I have joined another group after TAP, but I took a break from the chatroom because it was starting to become crowded and different people were teaching different techniques that made my chart overpopulated with different indicators, a lot of wannabe teachers emerged that I was getting confused. This is when I decided to follow ZFT as I have been reading and hearing about Boss Zee’s blogs over the years but I’ve never really applied what I’ve learned from them. Having thrown his system, the dear Mr. Darvas just like my beloved self, started buying high and selling low, he started to feel fear, he started to blame other people for his foolish mistake, he became stubborn.
Side note: I learned a business lesson when I was at the latter part of the book, while viewing some old telegrams in the book, I stumbled upon something and for me this can be a very important business lesson: I observed that Western Union used to be a cable telegram company, but what are they best known for today? Money Transfer. Why do you think that is? For me, the obvious answer is that they had to innovate, they had to follow the market’s direction. In the past decades there was a fast development of technology which fueled the parallel speed of financial growth all around the world. They just had to follow the flow. Similarly, in stock market trading, we just have to follow the flow of up-trends – my recent awakening.
Well, the above was just my thought. So, I googled Western Union:
The Western Union Company is an American financial services and communications company. Its North American headquarters is in Meridian, Colorado, although the postal designation of nearby Englewood is used in its mailing address. Up until it discontinued the service in 2006, Western Union was the best-known U.S. company in the business of exchanging telegrams.
Western Union has several divisions, with products such as person-to-person money transfer, money orders, business payments and commercial services. They offered standard “Cablegrams”, as well as more cheerful products such as Candygrams, Dollygrams, and Melodygrams.
Western Union, as an industrialized monopoly, dominated the telegraph industry in the late 19th century. It was the first communications empire and set a pattern for American-style communications businesses as they are known today.
I’m just happy I was quite right with my observation 😊
Remember the story of how NOKIA failed? Western Union’s story is the exact opposite. They did not let the fast market change turn against them, instead they found a way to ride the wave. They were resilient, that’s what I want to be – a resilient trader.
— End —
I enjoyed re-reading my review, though these was written by my innocent self (I’m still a novice by the way), it feels good and I still learned or re-learned something from the task.
Until next time! Tata!