Darvas Box Formula: How is it Calculated?

If you want to trade the Darvas box, a formula is important to execute the strategy properly.

The Darvas Box formula is equal to 52-week high multiplied by 20% to get high momentum stocks and then divide 52-week high by 52-week low, which should be equal to two or more to validate the trend.

Including:

  • What is a Darvas Box?
  • Within 20% from the 52-Week high or All-time High
  • Doubled from 52-Week Low
  • Enough volume
  • Price above $5
  • Complete formula

20% below the 52-week high is the sweet spot for most momentum traders.

Momentum traders usually buy stocks at these levels because they believe that there is a strong trend.

This belief or theory is often effective when applied to real trading.

Why do more traders get into the stock when the stock price reaches 20% below the 52-week high?

It is because a strong stock often remains strong for a longer-period.

The strength will continue because more and more traders are buying the stock.

They buy more because they see an uptrend with a pullback.

Aside from realizing that there is an uptrend, often, trading at 20% below the 52-week high is simple to execute.

It takes away the complexities of trading.

Some complexity involves where to buy and sell stocks, or how to follow the trend.

What is a Darvas Box?

According to Investopedia, Darvas Box is a momentum strategy by drawing a line along highs and lows. (source)

It is a range or consolidation within a strong uptrend.

A breakout above the high is usually a signal to buy the stock.

However, in reality, it is not excellent advice to buy every Darvas box breakout.

It is not advisable because the buy entry may already be too late.

Instead, it is better to buy before the breakout to avoid too many problems and losses.

To solve these problems, a formula is important for finding Darvas box before the breakout.

There are two types of momentum indicators used in this strategy.

First, stocks at within 20% from the 52-week high, and finally, stocks that double from the 52-week low.

Within 20% from the 52-Week high or All-time High

The Darvas box formula requires upward momentum before considering a stock.

Further, momentum signals are vital to this trading strategy.

The strategy is simple because traders only buy when the price is within 20% below the 52-week high.

52-week high is the one year resistance and 30% below it invalidates the trade.

The invalid price point is the price level, which often called the stop loss.

Stop loss prevents traders from incurring more losses if the uptrend does not continue.

It is easy to exit the trade without too much stress.

Further, it follows the trend without too many complex strategies.

Complex strategies such as breakouts will not help new traders because it creates fear.

For example, if there is a pullback after a breakout, new traders often close their positions.

Why do traders often make these mistakes of closing out trades prematurely?

It is because of situations they cannot control. E.g. temporary pullbacks of price after breakouts.

How do traders prevent being scared while trading?

Traders can buy before the breakout sell when the breakout did not push through.

The selling point can be 30% from the 52-week high or a 10% loss in case the trend is not as strong as before.

It is 10% stop-loss considering that the traders are buying within 20% from the one-year high.

The stop loss is wide enough for traders to absorb the usual volatility of trading stocks.

Volatility is an account destroyer if not handled properly.

It makes day traders lose a lot of money because of having too narrow exit levels or stops.

But, with Darvas box, did Darvas exited his trades at the price break below the box?

Yes, he did, didn’t he?

However, traders should always remember that stocks do not move in a straight line.

There is often a behavior, for example, a move downward before a move up.

Because of this behavior, it is important that a trading system can absorb volatility.

If the strategy cannot handle volatility, it a system which may make no money.

Doubled from 52-Week Low (52-week high/52-week low)

One of the best momentum indicator in technical analysis is the doubling of price from the 52-week low.

If the stock has doubled from the one-year-low, it must be a strong stock.

It is a strong stock because people are buying up the stock.

A strong stock often remains strong for a considerable period unless there is a change in the trend’s behavior.

The trend is a move that is detected by the 52-week high and low, and then also confirmed by price which is 20% below the high.

These two indicators can confirm an uptrend, which is also referred to as the Darvas box formula.

Volume must be enough

Not all stocks are excellent for traders. Some are not liquid which poses a lot of problems.

An example of a problem is not being able to close out open positions because there are not enough sellers.

When there are no sellers at higher prices, traders are usually at a loss because they can only sell at lower prices.

Because the stock is moving down, the traders may incur more losses if they do not close ther open positions.

Price is above $5

New traders can avoid too volatile stocks by filtering out penny stocks. Penny stocks are usually at a price lower than $5.

However, not all stocks priced below $5 is a penny stock. Sometimes, large-cap stocks are below $5.

Yet, $5 is a sweet spot for most new traders because it is affordable and not to expensive for those who do not know about market capitalization.

Complete Formula

Combining all the needed signals and technical indicators above, the formula below can scan Darvas stocks with a tool.

The tool often recommended by systems traders is Amibroker.

a1 = Highest(High); //all time high
nearalltimehigh=a1*.8;
dbl=Ref(HHV(High,252),-1)/Ref(LLV(Low,252),-1);
Filter=dbl>=2 AND C>.8*Ref(HHV(High,252),-1) AND C>nearalltimehigh AND V>100000 AND C>5;
Plot(a1,"All Time High",colorRed,style=styleLine);
Plot(Ref(HHV(High,252),-1),"52wkhigh", colorBlue,style=styleLine);
Plot(Ref(LLV(Low,252),-1),"52wklow", colorRed,style=styleLine);
Plot(nearalltimehigh,"20%",styleLine,colorBlue);
AddColumn(C,"Close");
AddColumn(V,"Volumne");

_SECTION_BEGIN("Price");
SetChartOptions(0,chartShowArrows|chartShowDates);
_N(Title = StrFormat("{{NAME}} - {{INTERVAL}} {{DATE}} Open %g, Hi %g, Lo %g, Close %g (%.1f%%) {{VALUES}}", O, H, L, C, SelectedValue( ROC( C, 1 ) ) ));
Plot( C, "Close", ParamColor("Color", colorDefault ), styleNoTitle | ParamStyle("Style") | GetPriceStyle() ); 
_SECTION_END();

If traders do not have Amibroker, they can use investing.com stock screener.

In the screener, choose the 52-week high filter and type -20% to -10%.

The filter will look for stocks that have prices within 20% up to -10% below 52-week high.

Then, the hard part is looking for each stock that has doubled from 52-week low.

I forgot to mention that traders need to mark the top and bottom of the Darvas box to visualize the price action on the chart.

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