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HowIMadeMoneyUsingtheNicolasDarvasSystem,WhichMadeHim$2,000,000intheStockMarket

SteveBurns

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Thisbookisdedicatedtomystocktradingmentor,

NicolasDarvas.AlthoughInevermethim,

hehastaughtmemoreaboutstocktradingandinvesting

thananyoneelse.Ihopethisbookdoesjusticetohisinvestingprinciplesand

memory.

CONTENTS

Introduction

Chapter1:WhowasNicolasDarvas?

Chapter2:UnderstandingtheGame

Chapter3:ThinkinglikeNicolasDarvas

Chapter4:EnteringtheGame

Chapter5:LearningfromLosing

Chapter6:HowtoManageyourRisk

Chapter7:MyDarvasStockTrades

Chapter8:WinningtheGame:Soyou

wanttotradelikeNicolasDarvas?

Chapter9:Rules

Conclusion

On the afternoon ofJanuary 4, 2008, the DowJones Industrial Average fellto 12,800. From the priceactionofthemarketIdecidedtotakeallmyinvestmentsoutof stocks and put them intocash.Ihadbeensellingoutofthemarketduringdowntrendsin late 2007 but somethingwas different about thisaction. Money was flowing

out of the stock market at afasterandfasterpace.

Thedecision tomove fromequitiesintocashenabledmeto keep my profits from the2003-2007bullmarket,whichhad grown my accounts to$250,000. Iwasable to keepmyprofitsthroughthemarketcollapse that ensued in 2008and2009.ThisbookcontainsthelessonsIlearnedfromthebooks of legendary investor

Nicolas Darvas, whichenabled me to accomplishthis feat. Hopefully they willhelp you through theturbulent times thatnodoubtlieahead.

Introduction

I wrote this book toexplain how Nicolas Darvasmade$2,000,000inthestockmarket.Hisbooksdo agreatjob telling his story, but hedoes not use the samevocabulary as the modernstocktraderandinvestor.

Darvas invested instocks which had the bestrelative strength in the stockmarket. He practiced riskmanagement throughhisstoplosses. He was a growthinvestor.Hedidnotknow it,but he was a trend traderbefore the use of the wordentered the trading world’svocabulary. Nicolas Darvaswas able to control hisemotions by avoiding livetrading altogether; he put in

hisbuystopsandtrailingstoplosses when the market wasclosed.Bytradingafterhourshe avoided the adrenalinerush of making decisionswhile the ticker tape wasrunningandwhilelivequoteswereavailable.Theability tocontrol your fear and greedwhile investing is one of themostdifficultthingstodo.

He was a system traderfollowing predetermined buy

and sale signals. The systemhe used to trade made itpossible for him to removehis ego from trading andsimplyworkhissystem.Asatrader, you must distanceyourself from the wildemotional swings thatcharacterize some traders,who need to be right for thesake of their egos. Instead,you must adopt the mindsetthat it is simply your systemthatdidnotworkandthatyou

willwork on your system ortrading rulesafter themarketcloses for better performancethenextday.

The Darvas method isvery similar to RichardDennis’ legendary “Turtle”tradersofthe1980s.Someofthemostsuccessfultradersinthe turtle program becamemillionaires.Manyof the topturtletradersmanagemillionsofdollarssuccessfully to this

day. Like Darvas, theyboughtatnewhighsandwentshortatnewlowswhichweremade during specific,predetermined time periods.(However, they tradedcommoditiesnotstocks).

If Nicholas Darvas hadbeen alive in the late 20thcentury, I have no doubt hewouldhavemademillions inthe Internet bubble byinvesting inYahoo,Amazon,

Microsoft, and other highflyers.

I also have no doubt hewould have been in all cashbyMarch2000withmillionsin the bank, unable to findanystocksmakingnewhighs.I also know he would havebeen in Apple, Google, andResearch in Motion in theearly bullmarket of the 20thcentury as these stocksdoubled, tripled,andwentup

fivetotentimestheiroriginalprices.

While I write this inJune of 2010, the stockmarketisatacrossroads.TheDow is hovering around10,000 and the market isgrowing volatile again. Iwouldliketoseethisbookinthe hands of investors andtraders who are preparing tobecome millionaires duringthe next bull market, which

will sneak up on everyone.Youwill likelygetaglimpseof thenextmonsterstocksasIdidin2004,seeinganearlyBlackberryandhearingaboutiPods. At that time I wasunable to identify theseproducts as the creations ofexplosively fast-growingcompanies. I had not readNicolasDarvas’booksatthattime.Iwouldlikemyreadersto be able to check thecompany stocks of products

and be able to determine ifthey are good stocks forinvestmentpurposes.

Are they at all-timehighs? Do they have highexpectations for earningsandsales growth? When shouldyou buy them?When shouldyou sell the stock once youbuyit?Howlongshouldyouhold the stock? I hope youwill be able to walk awayfrom this book with answers

tothesequestions.

The next Darvas stockscould be alternative energycompanies, hi-tech batteriesforelectriccars,somekindofwireless Internet technology,acompanythatrevolutionizesthe use of the Internet, oreven something we cannotimagineatthispointintime.

These stocks do nothide; they are found in

financialpapersunderStocksat 52-Week Highs; they arefound in Investor’s BusinessDaily Top 100 Stocks. Thebestway to locate them is todoasMr.Darvasdid: searchfor stocks at all-time highsthat continue to advance onhigher volume.With the ageof the Internet and YahooFinance,thisisasimpletask.

It is my deepest wishthatyouarehighlysuccessful

and become a millionaireduring the next big bullmarket. As long as thecapitalist system of theUnitedStates is inplace,restassured that millions ofentrepreneurs and employeesin corporations are workingdiligently rightnow tocreatea ‘world changer,’ as theyhave done throughout ourhistory.Itislikeparticipatingin a lottery that is wonthrough ingenuity and hard

work. When companieschange the world, you canparticipate by buying theirstock. This is basically whatNicolas Darvas did and howhemade$2,000,000.

Chapter 1: Who wasNicolasDarvas?

In the late1950s,amannamed Nicolas Darvas madewell over $2,000,000 ineighteen months buying andselling stocks. Was NicolasDarvas a famousWall Streettrader? No. Did hemake his

fortuneasafloortraderinthemiddle of the action eachday? No… Then surely hewas a full-time trader orinvestor focusing his everyday, all day, on making hisfortuneinthemarket?No;hewasadancer,andmostofthetimehesleptwhilethemarketwasopen.

NicolasDarvaswasbornin 1920 in Hungary. Hestudied economics at the

University of Budapest. Hecame to the United States in1951 and was a professionaldancerwithhispartner,Julia.His journey into the marketsbegan in 1952 when he wasofferedtobepaidinstockforaperformanceatadanceclubinToronto.Hewasunabletomake the engagement butpurchased the stock as agestureofgoodwill anyway.What he ended up with was6000 shares of a small

Canadian mining stocknamedBrilundatacostof50cents a share. He went onabout his business and a fewmonths later he happened tolook up the quote for thestock, and to his amazementit was quoted at $1.90 ashare!Hehadmade$8,400inprofit in only a few monthsby doing nothing but buyingand holding a stock.Hookedon this fast money, Darvasspent the next six years

obsessively trying to figureouthowhewassosuccessfulwith Brilund and how hecouldrepeatthissuccess.

Unfortunately, Darvasdid not know that Canadianmining stocks just happenedto be hot at that particulartimeandthetimingwasgreaton the purchase. When hebegan investing he had noideawheretostartorwhattodo. At first he tried to trade

different Canadian pennystocks like Brilund, but metwith little success. He madethe mistake of cutting hisprofitsshort,whichrackeduphigh brokerage fees withcommissions. However, healways did a decent jobcuttinghislosseswhenhefelta stock was not going tomove up and make a profit.Thisprincipleallowedhimtostay in the game as he wasgettingstarted.

Ihope that readers learnthis lesson from this book.Cut your losses short andmove on to a betteropportunity; do not bestubborn and allow a losingpositiontogetawayfromyouand ruin your account orconfidence.

Youcanalwaysbuy thestock back if it turns aroundandbegins to trendupagain.This small principle of

Darvaswasahugesafetynetthat allowed his losses to besmall.

Darvas the Rookie alsomadethemistakeoflisteningtoworthless tips, influencinghim to buy stocks that wentnowhere. Stock marketgeniuses are not hanging outat the local bar or nightclub,andtheyareusuallynotyourcoworkers at the office. Theveryfactthatthesepeopleare

offering tips shows that forthevastmajorityof the time,they know nothing. Theworldofstockinvestingissocomplicatedthattheeducatedinvestor or trader does notoffer tips because he wouldalso have to explain properstop losses, position size, thecorrecttimetobuy,andwhento sell. If you do not receiveall this information then youcan be sure your tip isworthless.

Darvas next made themistake of subscribing toworthless newsletters. Thehuge majority of stock-tipnewsletters are useless. Ifnewsletter writers couldpredictthefuture,theywouldbe investing and trading andmakingmillions,notprintinga$2newsletterandsolicitingfor subscribers. Darvas puthis money on the newsletterpicks and began to fare evenworse than with his random

entries. He then decided tocancelhisnewslettersandgetadvice froma stockbroker–one of those guys make aliving in the market. Thismustbethekey,hethought.

Hewas half right; stockbrokers do make their livingin the market by advisingpeople which stocks to buyand sell, but theyprofit fromcommissions on thosechoices. They don’t care

about the direction of thestocks purchased; they careonlythattheaccountisactiveandgeneratingcommissions.

At this point in hisjourney, Darvas had readabout200booksonthestockmarket. His ‘Bible’ wasGeraldLoeb’s“TheBattleforInvestmentSurvival.”Darvasstated he would reread thisbookabouteverytwoweeks.

The next stop on hisjourney was to become astock fundamentalist. Darvasbecame wrapped up in theunderlying value of acompany versus its stockprice through the P/E ratio,book value, and othermeasurements.

After extensivefundamental study, he choseto buy the stock Jones &Laughlin Steel. This was a

steel company, and at thatpointintimeallthestocksofcompanies in the steelindustryweredoingverywelland going up in price –except for Jones andLaughlin, whose stock wasnot doing aswell in price asthe others in its industrygroup.Darvasfiguredthatthestockwasagreatvalueforitsprice based on the value ofthecompany.

Thiswasoneof theraretimes Darvas was stubbornabout an investment and didnotcuthislossshort.Hejustcould not believe that thisstock would keep falling inprice.Itdid,andhelostabout$9,000 through hisfundamental approach. Thisinvestment failure reallyrattled him, and hisconfidenceasaninvestorwasshaken. In the midst of hisdesperation, Darvas noticed

in his stock searches a stocknamedTexasGulfProducingthat was going up. He knewnothingaboutthisstockotherthanthefactthatitwasgoingup, and on a gut instinct hebought 1,000 shares andmadeabout$5,000inprofits.

Afterthisquickprofithebecame interested in thetechnical price action ofstocks and how they actuallymoved, regardless of the

fundamentalsofthecompanyunderlyingthestock.

He became a student ofcharts and price history. Helearned that he should holdwinningstocksbutselllosingstocksquickly,and that therewas a distinct differencebetween the stock of acompany and the companyitself.

Over a period of years

Darvas began to understandthat he must follow rules tolimit his losses and notabandon his systemwhen hebecame arrogant after manystraight winning trades, andto keep persevering throughhismanylosses.

He began to see thecritical importance of timingin his buying decisions. Hebegan to see how marketparticipantspushedtheprices

of stock prices upmerely onthe anticipation ofcompanies’ earnings growth,far before the actual growthevenoccurred.

During his study of thetechnical price action ofstocks, Darvas began todevelop his techno-fundamentalist approach thatwould lead to his millions.After extensive failures, bywhich he learned what does

not work, Darvas began topatientlywatchforstocksthatwere on a dramatic rise onhighervolume.

He began buying stocksthemomenttheybrokeouttohigher prices. He bought afew hundred shares at firstand then pyramidedadditional buys as the stockrose in price. He set trailingstopstolockinprofitssothatwhen the stock failed to

continue to rise in price anddropped back, heautomatically sold out andkepthisprofit.

These simple principlesleadtoDarvas’greatsuccess,accumulating millions inprofits in 18months in 1958and 1959. He banked theseprofits before the marketcollapsed after his amazingrun. He invested in Lorillardstock, the inventor of filter

cigarettes (profit $21,052).He made a nice profit inDiner’sClub(profit$10,328),which invented the creditcard. Hewas able to lock inhis profits in Diner’s Clubbefore American Expressentered the credit-cardbusiness. He participated inthe crazy run-up of the priceof E. L. Bruce and had noideawhy it was going up sofast.(Therewasanattemptedtakeover of the company via

buying a majority of thecompany through stock onthe open market) He walkedawaywith$295,305fromthisinvestment.

Darvas netted anamazingprofitof$409,356inUniversal Controls stock. Atthe same time he made anunbelievable profit of$862,031 in Thiokol, thecompany that was sellingrocket fuel while the space

race heated up. These wouldbe incredible profits foranyone today, but inflation-adjusted, they are evenmoreamazing.

Thefactthatthiswasnota big trader at an investmentbank working with millions,but a dancer that achievedthese results in his ownpersonal account, makesDarvas’ successes some ofthe most profitable I have

ever heard of from a risk-adjusted standpoint over an18-monthtimeframe.

WhileDarvasdidbenefitfromaragingbullmarket,healso had the advantage ofinvestingduringtherighttwoyearswiththerightsystemattherighttime.Thefactis,noone else reported personallywalking away with that kindof money. So too, in theInternet bubble run-up of the

late ‘90s and in the recent2007bullmarket finale,veryfew investors and traderswalkedawaywiththemoneythey had earned in the good-timebullmarketparty.

I wrote this bookbecause I was able to takeDarvas’ lessons and do thesamethingonasmallerscale.The Darvas system in itspurest form can make you amillionaire in a bull market.

His principles can make youan expert investor in atrending market. The Darvassystem can give you thesignal to go to cash beforeyougivebackyourprofitsasanoldbullmarketends.Youwill also learn when to sellyour stocks to avoid bearmarkets from ravaging yournetworth.Letmeexplain.

Chapter 2:Understanding theGame

Whether you are anaggressivedaytraderorwantto be a better investor, Ibelieve this book containsvaluable information andprinciplestohelptheaspiring

stock market student besuccessful.

If you decide not to usethe Darvas system in yourinvestingor tradingafteryoufinish reading this book, youwill still walk away with anunderstandingofhowNicolasDarvas and many otherlegendsmade fortunes in themarkets.

If, however, you have

thecourageandpersistencetotrade the way Darvas andmany others have, yourealistically could end up amillionaire in a matter ofyears with a strong bullmarkettoassistyou.

How can Imake such aboldstatement?

I started with nothingand currently I am almostone-third of the way to a

million.IhavebeenusingtheDarvasmethods inmy 401Kwithgreatsuccessforthepastsevenyears, even thoughmyoptionsare limited inside thetax-deferred account. Thesystem also kept mybrokerage account in placeduring the recent marketmeltdown. But mostimportantly, I did not loseanymoney during the recentmarketmeltdown,and that isthe crucial difference when

you take anoversized risk tomakelargecapitalgains.

If you give your profitsback by letting losses runagainst you or try to bottomfishbackintooearly,youcanlose sizeable amounts ofmoney. That is why it is soimportantthatyouwalkawayfrom this book followingtrends while they last andcutting losses when you arewrong. This advice alone

could be worth sixfigures.The principles in thisbook are similar to themethods used to makemillions by famousindividuals such as JesseLivermore,WilliamO’Neal–publisher of Investor’sBusinessDaily–andRichardDennis of Turtle-tradingfame.

At heart, all of theseinvestors and traders were

trend traders, making theirfortunesbysimplygoingwiththe herd. They got in at theright time when the trendestablished itself and got outwhen itwas thebeginningoftheendofthetrend.

They did not rely onpredictions, guesses, orcrystal balls. They wereobservers of humanpsychology through priceactionandvolume.Theyrode

thewavesoffearandgreedinthemarketsastheykepttheirheads clear and madedecisions based on systemstheyhadcreated,givingthemsignals on when to buy andsell based on probabilities.Thisgavethemanedgeinthemarket.

JustlikethehouseinLasVegas has an edge overcustomers and eventuallywins through customers’

losses,sotodidthelegendarytrend traders make theirmoneyfromthe80%-90%oftraderswholosemoneyinthemarket.Whileamateurswereselling when a stock hit afresh high, the legends werebuying, and sometimes thestockwouldgoontodouble.When new traders werebuying a stockon a $10pullback from a new high, thelegends had already soldbecause they knew the trend

was over by the volume andpriceaction.

Howdidtheyknow?

Nicolas Darvas knewthrough the price action andinterest in thestockbasedonvolume. In this book I willexplainhowyoucandowhatNicolasDarvasdid.

What really causesstocks to go up? How are

they linked to the underlyingcompany? It took me manyyears to understand theseconcepts, and I will attempttoexplainthemtoyouinthischapter.

Where does a stockcomefrom?Whenacompanyis privately owned, severalinvestorsmayownastake init. When it goes public, aninvestment bank ensures thatthe company complies with

all relevant rules andregulations and sells itssharesintheopenmarket.

Theoriginalownerswillbe allocated shares based ontheir private stake, butownership is then dividedinto millions of shares formillions of partial owners.For example, if company Awas thought to beworth $10million, then the investmentbankcouldcreateonemillion

shares at $10 each and takethe company public bygetting it listedononeof thestock exchanges – the NewYork Stock Exchange, theAmericanStockExchange,ortheNasdaq.

The money raised fromthe public offering would gototheoriginalowners,andofcourse the bank wouldreceive healthy fees for theirpart. The original owners

could also decide to retainsome shares themselves tomaintain control of thecompany.Onceacompanyistraded publicly, the newstockholders are all partialowners.

The company is thenmanagedbyaPresident/CEOwho is accountable to theboard of directors andshareholders for profitability.The amazing thing is that

once thesesharesaresoldonthe open market, investorsdetermine the prices. Stocksare not really tied to thefundamental value of thecompany, and thecompany’sbook value and earnings pershare have very little to dowith its stock price. Whatalways determines a stockprice ishowmucha seller iswilling to sell it for andhowmuch a buyer is willing tobuy it for. That is the reality

of the game. Investors’ pricebidsforstockistheonlytruevaluation.Perceptionofvaluecreates the reality ofprice.The major motivationforsomeonetobuyashareofstock is the belief that theywill be able to sell it tosomeone else for a higherprice in the future. This istrue whether it is masterinvestor Warren Buffetbuyingmillionsofsharesofacompanytoholdfortenyears

based on fundamental value,or an amateur day traderbuying a few hundred sharesthat he hopes to sell a fewminutes later for a $100profit.

Onceyouunderstandtherealpsychologyofthemarketyou will begin to beprofitable in both investingandtrading.Therealvalueofa stock is the price at whichsomeone will buy it from

you. There are timeswhen amerger or buy out offer willbring out the true underlyingvalueofastock.Thisiswhena tenderoffer ismade tobuyall outstanding shares ofstockonordertopurchasetheunderlying company.However, this is rare. Moststocks are bought and soldbased on the psychology ofthebuyerandseller.Fearandgreedrulethemarkets.

Onebuyermaybuyintoan uptrending stock for nootherreasonthangreedasthepricegoeshigherandhigher.At the same time the sellermightbe selling fromfearofgiving back paper profits intheopentrade.

Marketparticipantsvary.When we enter the marketswe are trading along withhedge funds, mutual funds,large traders, amateurs, day

traders, swing traders, long-terminvestors,pensionfunds,position traders, scalpers,floor traders, trend traders,endowments and sovereignwealth funds, tonamea few.Alloftheseparticipantshavedifferent reasons for timingtheirtrades.

Make no mistake: themajority of marketparticipants are professionalsand do not enter the market

lightly. There is no othervenue where you can makesuch incredible profitsthroughtheclickofamouse.However, on the other hand,you can also lose a lot ofmoney if you don’t knowwhat you are doing.You aredealing with professionalswho generally take moneyaway from the majority ofamateurs.

When investing and

trading, you must have asystem that over timeoutperformsthemarket.Iwillshow you in this book howNicolas Darvas gave me theprinciples and system toprosperinthemarketsduringthe amazing bull run of theearly 21st century, andmoreimportantly, how tokeepmyprofits from the meltdownthatfollowed.

NicolasDarvaswasable

to see the market for thegamethatitwas.Asyouwilllearn in this book, legendaryinvestor Nicolas Darvascontrolledhisemotionswhilecreatinga systemformakingmoney in the stock marketbasedonotherinvestors’fearand greed. The key was tofollowasystemandnotmakedecisionsbasedonopinions.

Darvas understood thatfuture earnings expectations

drove stockpricesup, butheonly bought particular stocksthat were already beingdriven up by increasedvolume. He was a trendtrader; he bought into stocksthatwereinuptrendsandheldthem until the trend reversedstrongly, then sold out andlocked in his profits withautomaticstoplossorders.Hewasamasterofthegame,andmy goal is that when youfinish reading this book you

will have all the knowledgeyou need to use Darvas’system and principles to winthe stock market gameyourself.

Chapter 3: ThinkinglikeNicolasDarvas

Howdidadancer turnafew thousand dollars intoover $2 million in less thantwo years? How did a guyshun all of Wall Street’sadviceaboutinvestingandsetout on his own to make a

fortune doing what wascontrary to common sense?Why buy when a stock isgoing to an all-time high?Sell quickly and take a losswhen it falls, instead ofwaiting for it to gobackup?Ignore all of the underlyingbusinessvaluationsofastockwith its P/E ratios, bookvalues, and growthprojections that are supposedtotellyouifitisagoodvalueforitsprice?

Surely this is not thepath to a fortune. What ismost shocking is thatDarvaslethisprofitsrunanddidnotmake profits until the stockfell dramatically. Yet asshocking as these methodsappear, this is indeed how adancerwhoinvestedinstocksin the ‘50s and early ‘60smadeafortune.

But what is mostimpressiveisthatDarvaskept

hisfortuneanddidnotloseitin the nasty bear markets ofthelate‘60sandearly‘70s.Ihaveseenmanypeoplemakemoney by investing, stocktrading, or day trading, andthengiveitallbackandthensome.The latest bearmarketof2008and2009has shownthis dramatically, even forbuy-and-holdinvestors.

Who was this dancerwho became a stock market

wizard? His name wasNicolas Darvas, and he didwhat every budding stockinvestorandtraderdreamsofdoing: He became amillionaire ina short amountoftime.

Mypoint inwriting thisbook is to share with myreaders that it is possible –that in both bull and bearmarketsitispossibletomakean amazing sum of money.

The most important thing isto use the principles outlinedin this book when the nextbullmarketcomesaround,asthis is when the Darvasmethods work best. You canalso use variations of hismethods to trade stockswithinboxesforprofit.

InhisthirdbookDarvasalso explained how to shortstocks, even though themethod did not fit his own

personality. It fits mypersonality, however, and Ihave made nice profitsshortingonseveraloccasions.

In his books, Darvastaught the important lessonthatitisOKtogotocashandto exit the stock marketcompletely.ThisisalessonIwishIhadunderstoodduringthecrashof2000.Ilostabout$30,000 in my companyprofit-sharing plan when I

kepttryingtogobackinasIanticipated a rebound in theglorioustechnologysector.

The devoted buy-and-holders among us watchedtheir investment portfoliosmelt by 50% from late 2007to March 2009. The Darvasmethodwouldhavepromptedyou to get out as yourinvestmentdroppedbelowtheprice of its established pricebox.Themethodwouldhave

even given you the signal togoshort.

To think like thelegendary investor NicolasDarvas you must have anurge to buy a stock when itbreaks to a new high andhavenodesire tobottomfishafallingstockortotrytogetagreatvalueforyourmoney.

Youwantastockthat isinagrowingindustryandthat

people have ridiculousearnings expectations from.You don’t care about thefundamental value of theunderlying business – youcare that everyone wants tobuythestock.Youcarethatithas been going up for sometime and just popped up toyet another new high. Yourfavoritetimetobuyastockiswheneveryonethatisholdingit is sitting on a profit at anall-timehigh, and there isno

one holding it with a losswaitingtobreakeven.

You do not think aboutdiversity; you simply pickone, two, three, or maybeevenfourstocksthatyoulike,let the winners run, and sellthe ones that fail to continuetorun.

Youropinionhaslittletodo with your investing andtrading. You let the winning

horses run and put the losersout to pasture. You do nottake profits prematurely, andthe only reason you sell astockisifitfailstostayinitstopmost price range, or asDarvas called it, the stock’spricebox.

You keep your ego outof your investing. You tradeaccordingtoasystem.Ifyoudon’t make money, you didnot fail –your system failed.

You are a success if youfollowedyoursystem.

Failure is the result ofnot following yourpredeterminedsystem.Losingmoney is not a failure if youfollowed your system. It isdangerous to not cut yourlosses when it is time. It isalso amistake if youdidnotenteranautomaticbuystoptotake a positionwhen a stockonyourwatch listbroke toa

newhigh.

To think like Darvas,you have tomake judgmentsonhowmuchroomtoallowastock to move based on itspersonality. Some stocksswing wildly in 10-pointboxes and may need moreroomtofluctuatethanothers.Some stocks will be toovolatile for your personalityand some will be too boringto hold. Darvas’ system

suited his personality, andyou may have to adjust hissystem to suit yourpersonality. However hisprinciples of discipline, theright mindset, systemmanagement, cutting lossesshort, letting profits run,always buying into strengthwhile buying with theincreasingvolume,andgoingintocashattherighttimeareuniversalforalltraders.

To think like NicolasDarvas you must have thedesiretobuyhighattherighttime, believing that you willsell at a higher price later.Youmustallowthemarkettotell youwhat to do and stoptrying topredict.Yourdesiremustbe tobeton thebiggestandfastesthorsethathaswonthemostraces.

Chapter 4: EnteringtheGame

Therearemanyways toget into the game on WallStreet. Like Nicolas Darvashimself, you can open abrokerage account and getapproved tousemargin.Thiswill enableyou to investand

tradewithdoubletheamountofcashyoudeposit.

In otherwords, you candeposit $10,000 in abrokerage account and thenpurchase $20,000 worth ofstocks;withthisleverageyoucandoubleyourprofits inanuptrend,butbewarned–youcanalsodoubleyourlossesinadowntrend.

You can also enter the

game through a traditional401K through your job. It’samazing to me that manypeople do not participate in401Ks at work when theiremployer offers matchingcontributions.

If you want to buildwealth, this is one of thegreatestwaystodoit.Ifyouremployer matches yourcontributionsby10%ofyoursalary, then 10% of your

salary will be deducted intoyour401Keachpayperiod.

If you earn $52,000 ayear, you will contribute$5,200 annually to your401K,whichis$100aweek.Your $100 will be matchedwith your employer’s $100,giving you $200 total intoyouraccount.Plus,ifyouareina15%incometaxbracket,youwillalsosavethat$15intaxes each week, allowing it

togrowtaxdeferreduntilyouretire.

You can also expandyouraccountwiththeDarvasBox System by buying intothe market only duringuptrends and going back tocash in downtrends.You caninvest your 401K money inthe stock market through anS&P fund, stock mutualfunds, or your company’sstockifthatisanoption.

Yes,youmayhavebeentoldbythemainstreammediaor financial advisers thatinvesting your retirementmoney in your company’sstock is way too risky. Therisks are there, but greatlyexaggerated; if you tradefollowingtheDarvasmethod,theoddsareinyourfavorandyoushoulddoverywell.

If your company ismaking all-time highs, it is

unlikelytoenduplikeEnron,Global Crossing, GeneralMotors,LehmanBrothers, orBear Stearns. Even thesecompany employees had afew days to get out of thestock when the rumors (andthe reality) surfaced aboutthem. Do not let these oddexamples steer you awayfrominvestingwithyourowncompany;thekeyistogetoutthe moment the stock losessupport in itsbox– thatvery

moment,withouthesitation.

But these are theworst-case examples. What aboutemployees who worked forApple, Google, Walmart, orMicrosoft during theirstartup? These undiversifiedinvestors are nowmillionaires; they could havenotbeen“risky”andworkfor30moreyears.

This is not some crazy,

risky scheme; this is howDarvas invested, sometimesonlyholdingtwostocksinhisportfoliobutrarelymorethanfour.EvenlegendaryinvestorWarren Buffet claimed:“Diversityisforthosethatdonot know what they aredoing.”

Do not, however, investinyourcompanystockifyouare going to simply buy andhold it. The odds are against

you, and eventually, over along enough period of time,the stockwill crash, asmoststocks do eventually crashwhen companies fall out offavorwiththemarkets.

If,however,youactivelymanage your account andfollow the Darvas boxmethod, you can make veryoutsized returns in bullmarkets, or a fortune if youare the onewhoworks at an

Apple, Google, or Walmartwhen the company is firstgrowing at a rapid speed. Igrewmyown401Kbymorethan 20% a year for severalyearsstraightasmycompanystock rocketed from $28 to$103asharefrom2003-2007.

I was limited to puttingonly50%ofmyfunds inmystock, which kept my totalreturns down significantly,butsuchareturnisstillworld

class. I also received optionson my company stock from2003-2007. I was able toexercise all of them at closetothepeakeachyear,andthelast options for $99 a share.Butonceagain,Iwasabletoremove my valuable 401Kmoney from my companyintoacashpositionbeforethemeltdown started and it fellthrough its toppricebox.By2009, the stock fell all thewaybackto$46ashare.Idid

not reenter my companystock until it safely broke a52-weekhighin2010at$81.

At that time I bought1000shares;itracedto$85intwo days but my happinesssoon turned intodisappointment as I soldwhen it rapidly fell to $81.After I was out it fell under$80 and back into the $79range.TheDarvasmethodforbuying into an uptrend does

not work as well in a slowmarket. The money is madein the high-volume bullmarkets. However the factthat it keeps you out of thebearmarketisoneofitsmainstrengths.

Do yourself the biggestfinancial favor and open a401Ktodayifoneisavailabletoyou.Put inenoughmoneyto get a full companymatch.Also, open a brokerage

account. Start with whatevermeans you have whereveryouare.

Most legendary tradersbegan with little and grewtheir accounts over years ofcareful system following.Donotconcernyourselfwithsizeat first. Nicolas Darvasstarted with a few thousanddollars that he turned intomillions.Ifwedowhathedidwecangetthesameresults.I

know because I have, and Iwas richly rewarded. Takethat first step. Do it foryourselfandforyourfamily.

Chapter 5: LearningfromLosing

Inthelate1990sIbeganreceivingcontributions into aprofit-sharing plan from mycompany.

The contributions werebetween 7%-12% of my pay

each year. Employees couldput this money in thecompany’s stock or mutualfunds. I chose the mostaggressive funds available tomeatthetime.

These funds wereinvested in technologycompanies and in Internetstocks.Thiswasgood timingas my paltry few thousanddollarsayearincontributionsgrew to an amazing $60,000

by March of 2000. I wasreceiving account statementsthat showed 40% to 50%annual gains in funds as theNASDAQ made its amazingclimbto5000.

Iwasonly28yearsold,and I figured I was a stockmarket genius: I wouldalways take on as much riskas possible and be richlyrewarded for it. While thereare many genius investors,

traders,hedgefundmanagers,and entrepreneurs duringraging bull markets, most ofthese wizards are usuallycrushed by losseswhen theirparticular strategy stopsworking as the marketschange, and they have noother system for makingmoney. This is whathappened to me, as I wascalculating how my accountwould grow exponentiallyoverthenextfewyearsasthe

Internet exploded and theprofitsrolledin.

The market was settingup for a top and collapse. Iwill never forget cominghome from work andwatching CNBC as theycelebrated the NASDAQbreakingthe5000barrieranddiscussed hopes for thefuture.

This was a red-flag day

for a top. 5000 was thatpsychological breakthroughpoint into a new mega priceboxthatwouldnothold.Thisisa lessonIunderstandnow,afterhavingexperiencedhugelosses from2000-2002.AfterI watched my account fallfrom $60,000 in March of2000 to a paltry $29,000 atthedepthsof thebearmarketin the firstquarterof2003, IpromisedmyselfthatIwouldnever again give back my

profits once I made themoneyback.IfIhadasecondchance in a bull market toacquireanotherbigaccount,Iwouldkeepit.

The main difficulty Ihave noted in trading andinvestingoverthepastfifteenyears isnot in themakingofprofits but in keeping thoseprofits.Youmustknowwhento make oversized profits bybuying into leading stocks

when new annual highs aremadeinthemarket.

I completely disagreewith buy-and-hold investing.Theadviceofbuyandholdissimply long-term,10-30yeartrend tradingwhereinpunditsbelieve that the long-termuptrend in the market willcontinue.

Whether it does or not,there are many simple ways

tooutperformthemarket.Themost useful method is tosimply go from stockmutualfunds to cash equivalentswhen a nasty recessionbegins. To quantify this intechnical terms, the besttechnique I have observed issimplemovingaverages.SellandgotocashwhentheS&P500 dips below its 200-daymoving average. This is thebestsignofabearmarket.Donot buy back in until it

crosses above a 200-daymoving average. This onesystem doubles the return ofstocksversusjustbuyingandholding. The 200-day simplemoving average is availableonYahoo!Finance.

Recession is expectedbecause unemployment isclimbing and the stockmarketisfalling.Thenumberone clue is when the marketfails to make new highs.

Staying in a market that isgoing down day after day isnot a good way to makemoney in themarket.Buyingintoamarketasitiscrashingis the perfect way to losemoneyandtolosesleep.

This was a lesson Ilearned only after readingNicolas Darvas’ booksexplaining price boxes.However this lesson yieldedgreatpayoffsin2007-2008as

a downtrend began and Ifound fewer opportunities toinvestandtrade.Thisleftmein cash as the stock marketplunged and my capital wassafely on the sidelinesearninginterest.

My 2000-2003 lossestotaled well over $40,000,which was a huge sum ofmoneyforme.InthoseyearsI was a buy-and-holdinvestor, waiting for the

reboundinthestockmarket.Idid this out of ignorancerather than intelligence. Iwouldhavebeenmuchbetteroff had I know about theDarvasmethodsback thenorhad I at least used the 200-daymovingaveragesasbuy-and-sellindicators.

Ipreparedmyselftoearnmymoney back and to keepit. I became interested whenthestrongrally in themarket

heated up in 2003 and Inoticed my own company’sstock jumping aggressivelyfromapriceina$15/$19boxto suddenly breaking at $23.Little did I know that mycompany’s stock, DelhaizeGroup,wouldrocketfromtheteenstoover$103.90ashareby 2007. By that time, Itraded it all way up throughmanyboxesandescaped likeabanditwithmyprofits!

Chapter 6: How toManageRisk

Risk is the element inyour trading that allows forprofit.Themainthingyoudoastraderismanagerisk.Yournumber one rule is: Controlyour losses. Darvas did thisso well with his stop losses.

Insettingpredeterminedstopsbefore he entered a trade,Darvasmeasuredhisriskandcontrolled it upfront. Hisupside was hypotheticallyunlimited, but his downsidewasmeasured and controlledby studying andunderstanding the pricehistoryandactionofthestockitself. Before Darvaspurchased a stock heunderstood the price rangethat the stock was currently

tradingin.Helookedatpricehistory to determine the keyresistance point where thestock had trouble movinghigher, and at the supportingpricewherethestockstoppeddropping and buyers movedin.

Heusedwhathe saw tosethisstops.Ifastockwasina price range of 50/55, thenhewouldputinabuystopat$55.01. (In Darvas’ time

period, stockswere traded infractions so these arehypothetical examples indecimals). In most instances,ifthepricebrokethroughandreached $58, Darvas wouldfollowupwith a stop loss at$54.99.Ifthestockwastrulyinanuptrenditwouldnotfallback into an old price box,and it was expected tocontinue to move up andattract more buyers. The oldresistance became the new

support. This juncture isessentially a secondopportunity for buyers wholosttobuyonthebreakout.

Darvas also managedriskbygivingbackhisprofitsinastockthroughtrailinghisstoplossupasthepricerose.Amajor risk in trading is tonot lock inprofitswhen theyare there. I have read horrorstoriesofpeoplewhoboughtintoInternetcompaniesinthe

late ‘90s and held the stocksand become millionaires onpaper, but never locked intheir profits. These investorswatched a few thousanddollars in stocks grow intoover a million dollars; theyalso watched their profitsdwindle into a few thousanddollars. This is trulyheartbreaking, and I am sureverystressful.

You must follow

Darvas’ lead and set yourstopstotakeprofitsoutofthemarket when the marketbegins to move against you.As we have discussed, thesetrailing stops should followthestockasittrendsupwardsand be at the top of an oldbox as the stock breaks to anew price box. If the stockreturns to its previous highyou canbuy it back and joininthenextlegoftherally.Ifit never returns to that high,

you have locked in profitsand avoided the terribledowntrends that engulf thehottest growth stocks as bearmarkets begin. Your maintools for managing risk arethe stop loss and the trailingstop. Through these moneymanagement techniques youprotecttheriskoflosingyouroriginalcapitalandavoid theriskofgivingbackyourhard-earnedprofits.

It is surprising to learnthatbuyingwhenastockisatahighinhopesofsellingitatanevenhigherprice ismuchless risky than buying as itfalls to a lower lowwith thehopethatitwillrisebacktoaprevioushighprice.

Save your bargain-huntingfor thegrocerystore.When stock trading andinvesting, buy the strongeststock in the strongest sector

the moment it makes a newhigh out of an establishedbox. This is how the mostsuccessfultradersofalltimestraded.

The stock market is ademocracy wherein eachtrade is a vote. When allparticipants are voting on astocktogoup,castyourvotealongside them by buyingthat stock. At that point theodds are in your favor as it

unlikely that the stock willsuddenly reverse. It ispossible and it does happen,but controlling risk is aboutmaking high-probabilitywinning trades,which lowersoverallrisk.

Buying into a decliningstockas itmakes lower lowsis very risky. Everyone iscasting their votes on adecliningprice.Goingagainstthe majority and buying a

stockwhileitisdecliningisagood way to pay ‘stupid’tradertax.Afallingstockcanaccelerateintheplungewhenfeartakesover,andbuyinginat the first signof strength isusuallyafool’sgamecalleda“dead cat bounce.” Alwaysswiminthesamedirectionasthe river flows; to swimagainst the river is risky anddangerous.

When the market is

increasing on heavy buying,gowith the flow and lock inprofitsasitgoes;trendsworkbecause when a stockmakesa new high, itmeans that alltraders and investors aresittingonaprofit.Whosellsastockwhentheyarewinning?When greed kicks in,stockholders start imagininghugeprofitsandholdonuntilthey are spooked by acorrection.Ontheotherhand,when a stock is at all-time

lows, every stockholder issittingonaloss,hopingtogetout at a better price; hence,thestockpricehastoclimbawall of worry. As each oldprice box is reached,stockholders think: “Thankgoodness; now I can get outat the price at which Ipurchased this stock.” Thestock meets a tremendousamountofsellingpressurethewhole way back up. This iswhy it isso important tobuy

stocks at all-time highs andavoid all the pent-up sellingwhen trying to regain an oldhigh.

InDarvas’thirdbookheadvises never to lose morethan 10% on a losing stockand never to give backmorethan 20% in profits on awiningstock.Thisisthemostyou should risk. However,mostpriceboxesarelessthan10%,andthetopsofprevious

boxesforwinnersareusuallyfar less than 20%. I wouldadvise using thesepercentages as hard stops. Ifthe stock you are watchinghas price boxes greater than10%, then the stock isprobablytoovolatiletoinvestin. It may also stop you outbecause of wild swings inprice, or you may not havethe stomach for a particularstock’spersonality.

Somestocksbehavelikecrazy spouses, initiallypampering you and givingyougifts; then they suddenlyact crazily and takeeverything back. Invest instocks that fit yourpersonality and your risktolerance.Darvas stocks stayinasteadyuptrendandinsidetheir price boxes until thebreakout, after which theyleave their boxes and do notreturn until they stop

trending. Darvas alsorecommends only watchingthree or four winning stocksat a time so as not to diluteyour attention among manystocks.Priceboxesshouldbeestablishedoveratleastthreeweeks.Buyatthemomentofa breakout; do not chase astock that has already runthrough a box in a few daysandismakingnewhighsforasecond time. In thoseinstances, you are usually

buyingthetopofanewpricebox where it will meetresistance.Ifyoumustbuyin,make your purchase at thebottom of the new price boxwhich was established afterthebreakout.

While the Darvasmethod appears risky givenitsfocusononlythreeorfourhigh-growth stocks andbuyingintouptrends, theriskis controlled by buying into

high-probability situationsandstoppinglosseswhenyouare wrong. The winners arehuge,andonewinnerusuallymakes up for several losers.Thekey is timingyourbuys,cutting your losses, andfocusing on the pricebehavior of the hottest stockinthemarket.

Chapter 7:MyDarvasStockTrades

I have deployed manystrategies over the past tenyears since my catastrophicloss of 50% of myinvestments after the Internetbubble burst. After themeltdown, my plan was

actually buy and hold. Ifigured it was safe to startdollar-cost averaging backintomy401KsinceIdidnothavetoworryaboutamarketmeltdown. Why? Because ithad already happened: withmostofthemarketdownover50% and tech stocks downsome80%or90%,IfiguredIhad a hugemargin of safety,justasWarrenBuffetlikestohave before he invests hismoney.SoasIpositionedmy

401K money into aggressivegrowth stockmutual funds, Ibegan to contribute themaximum amount mycompanywouldmatch.With5% of my incomecontributed, my companywould allocate 4%; this wasan 80% return onmymoneythat I was not taxed on. Inaddition, this money wouldgrow with no capital gainstax.AllIhadtodowasbuyatwhat I figured was a great

priceeachmonthandwait.

This was the plan from2000untiltherecovery.Ihadgonefrom$60,000in2000todipping below $30,000 in2003. The level of pain Iexperienced is hard todescribe to anyone who hasnot gone through it. If youhad a similar experienceduringthemeltdownof2008-2009,donotfret!Ifyouhavea long enough time horizon

youcanget itback.You justneedtherightstrategyforthemarketconditions.

In 2002 the market wasstill dead and I kept buyinginto the market at lower andlower prices. My companystartedgiving storemanagers300 shares of stock optionsannually. My first 300-shareoption was at $28 and couldbe exercised to profit if theprice of the stock increased

over the option price. Onehundred of the shares wouldbeavailableaftereachyearofemployment. Within monthsof offering this benefitpackage, the stock promptlydoveto$17ashare.Well,somuch for that; I thought thestockwastoast.

Within a year I wasscramblingtofindmyoptionspackage as the stockexploded toover$48a share

and kept going alongside therest of the market.With thisamazing move upwards Idecided to start deployinghalf of my 401K money toinvest in the stock of mycompany(DEG).Asthestockmade new 52-week highs Ifelt secure in the earningsgrowth of the company andtheinterestofinvestorsinthestock. I did not know it yet,but buying into strength andholdingastockasitbreaksto

higher all-time highs is theDarvasmethod.

By late 2004 I hadreturnedtomyoriginalequityof $60,000 through buy-and-hold and dollar-costaveraging, along with(unknowingly at the time)using the Darvas method toload up on a hot stock with50%ofmyavailablecapital.Ifelt confident in an eventualrecovery and I had been

rewarded, but this was onlythebeginning.Iwasabout toparticipate in a monster bullmarket.

By 2005 I had readNicolasDarvas’ book: “HowI Made $2,000,000 in theStockMarket,”andIrealizedthatthemarketwasbeginningto trend higher. I began towatch my company’s stockon my computer daily, evenhourlysometimes.Itbeganto

pullaway toanall-timehighof$61 inSeptemberof2004andIwasonboardridingthehighs. Reading the Darvasbookafewmonthslatergaveme theconfidencenot to selluntil itbrokedownoutof itsstrong price boxes that werestacked one on top of theother. At the same time, mycompanywas givingme andmywife 300 stock options ayear. (My wife is also inmanagement).

These options were notlike the ones traded on theoption exchange.Theseweresimply 300 shares issued atthe current market price thatentitled you to profit in 100oftheshareseachyearforthenext three years if theprevailing market price wasmore than the option price.As these options stacked ontopofeachother,wehadtherightstoalmost1,000shares.In December 2004 the stock

hitover$78ashare,thenfellout of its box at $73, and Isoldoutofmy401Kpositionbeforeitplungedto$58.Thatis another Darvas method:Sell when the stock falls outofitscurrentpricebox.

By the summer of 2006itwasbackover $70 a shareand breaking price boxes,going higher and higher. Iwas buying as it jumped tohigher highs, hitting $83.70

by late September, pullingback, and then hitting 90 byMarch of 2007. It was quiteenjoyable to see my accountgrowandgrowdayafterday.I started playing the priceboxes themselves, selling atthetopoftheboxandbuyingona$5pullback,thensellingagain at the top of the box.This differed from the pureDarvas method, but it stillused his box system. AsDarvas explains, in his box

system it is safe to buy atsupport so long as the stockdoes not fall below theestablished price box. In histhird book, Darvasrecommends shorting if astock falls below the latestprice box range. (He nevershorted,asitwentagainsthispersonality, but he validatedthestrategy).

The DEG stock finallyhit an all-time high of

$102.25on July23,2007, asit pulled back to $99. Overthe next few days I sold outof all my available optionsand took my 401K moneyback to mutual funds. Thatwouldbetheall-timehigh,asthe stock started to fall anddidnotfullystopuntilithitalowof$43.68onOctober27,2008. The beauty of theDarvas method is that I hadsold out ofmy 401K and allmy available options. I was

not“waitingforthemarkettocome back” or “buying abargain” on the way down.Bottom fishers trying to buyin at a low price for aninvestmentwerewrongwhenthey bought from$99 all thewaydown to$44.Therewasa move from about $70 toalmost$90 in early2008butit was choppy and volatile.Thismovewasthenfollowedby a dramatic plunge from$88to$60.

Remember: Always buyinto strength and sell intoweakness.There is danger involatilityandinamarketthatmovesupanddownviolentlywith little trend or reason.Trade in trending marketsonly and not in range boundmarkets if you want to tradelikeDarvas.

ThepureDarvasmethoddoes not earn you profits atall-timehighs;itgetsyouout

as the support is lost and thedowntrend begins. What itdoes do is give you thecourageandguts tobelieveastock will keep going higheruntil it is finished. I couldhave easily decided that the$61 all-time high was toohigh a price to pay and Iwouldhavemissedoutonanadditional $41 move to$102.25. I also could haveexercised my options tooearly and not waited for the

bigmove.Inbullmarkets,thehottest stocks have noresistance to higher andhigher prices; in bearmarkets,moststockshavenosolidlow-pricesupports.

In a market downtrendstocks can fall to incrediblylow levels, as was seen inMarch 2009. Readers mustnote that Darvas and I madethese gains in bull marketswith hot stocks. If you are

unable to find stocks at all-timehighsoratleast52-weekhighs,youaretryingtherightmethod in thewrongmarket;youareinabearmarket.Youwould do better to shortstocks that are at their all-time lows or 52-week lows.Darvas discusses this reversesysteminhisbook:“YouCanStillMake it in theMarket.”You simple reverse thesystem, selling short when astock falls out of its box and

covering if it rises back intoits previous price box. In awinning short, you buy itback when it starts going upin price back through theprevious price box.With mywinnings frommy company-granted options I set up amargined broker account. Inowhad the freedom toplayany stock. Where did I lookfor theseDarvas stocks?TheInvestor’sBusinessDaily100Top Stocks list is the best

placetolookforthestrongeststocksinthemarket.Youcaneither purchase access tothese at the IBD website orbuy or subscribe to theMonday edition of Investor’sBusiness Daily. I begantradingmybrokerageaccounthitting and missing as themarket grew choppier in late2007. I was more or lessbreaking even buying onbreakouts; Iwouldwin someandlosesome.

Then I started watchingApple.OnJuly3, itsall-timehigh was $122.09 whilemovingupboxafterboxwithhigherhighs.OnthatFridayIshouldhavesetabuystopfor$122.10 for the next day tocapture the stock when itbroke, but I thought I hadtime. This lack of disciplinecostme.AAPLwastradingat$128.80 at the open onMonday morning. I bought100 shares at $130.84

Monday. July 5; it wastrading at $132.75 at theclose. The next day I boughtanother100sharesat$132.25andAAPLclosedat$132.30.Iwaited.Overthenextsevendaysittradedina$129-$134box, never pulling backanywhere near the $122.10breakout.OnJuly12Iaddedan additional 100 shares at$133.37, as the earningsannouncementgrewnear andexcitement was at a high.

Three days later I added mylast 100 shares at $138.21. Inow held 400 shares at anaveragepriceof$133.66.

Apple was a gamechanger for the musicindustry with the iPod andiTunes; this is the type ofstock to look for in yourDarvas trades – high volumeand in the spotlight. AAPLran out of gas and could notget above $145. I sold out

400sharesatanaveragepriceof $142.90 when the stockstalled before earnings. Mynet profit was $3,696. I waspleasedwith this, and it wasmy first really successfulDarvas trade outside my401K and company stock.Inlate September of 2007,Research in Motion was onfire. Due to the hugeBlackberry sales and profitexpectations, the stock hadbeen going up like a rocket

foryears.Blackberrychangedits cell phones to smartphonesanditwasdominatingits market. As the earningsannouncement approached,RIMMbrokeitsall-timehighof$86.45onSeptember13.Ibought 100 shares at $87.10and 100 shares at $88.06.Two days later I added 100more at $87.27, then fourdaysafter thatpurchased100last shares at $92.28. AsRIMM stayed nicely in a

$93/$86 box (briefly at$85.42), I had no fear of itfalling out of the box. Thelows were brief and it wenthigherstrongly.

Sometimes you have togive your trades room towork.With the firstbreakoutcomingonAugust30at$85,Ifeltconfident thatwouldbethebestsupport toletRIMMbreath.OnSeptember26,twodays before earnings were

announced,RIMMshotupto$100.75, then fell to $97.95before closing at $99. Thenext day it went to $100.98,then fell to $99.12. Earningswere drawing near and itappearedthatithadrunoutofupward strength. Thishappensalotinstocks,whereround numbers act asresistanceandpeopleselloutwhen they see triple-digitstockpricesforthefirsttime.(This also happened in my

DEG stock). I sold out ofRIMMonSeptember27,400shares at $99.77 each for aprofit of $4,440 on mysecond successful Darvastrade.

That same year I alsotraded Garman, the GPSmaker, and Game Stop, theretailvideogamestore.Thesetrades were not successfullike the AAPL and RIMMtrades,and Igavebacksome

ofmyprofits.ButIcontrolledmy losses so they did notaffect my accountdramatically. The hotteststocks in the market werefailing to make new all-timehighs; this was a warningsign.As2007grewtoaclose,the market started to buzzwith bad news about realestate,andinterestrateswereclimbing; the Dow JonesIndustrial Average and S&P500weretoppingoutinearly

October 2007. Storm cloudsweregathering,butIhadonemoreDarvastradetomake.Iwent back to my belovedAAPL as it went to all-timehighs a few days after myRIMMtrade.OnOctober1 Ibought AAPL at $154.63 asAAPL once again broke tonew all-time highs. The nextday I bought another 100shares at $156.80, then fourdays later a final 100 sharesat $158.02. I sold out on

October 9, 300 shares for$168.35fora$3,561profit.

Throughthefallof2007themarketstillfailedtomakehigher highs, and it wasbecomingdifficulttofindanystocks making new highs. Ilost onmy attemptedDarvastrades of AAPL for a thirdtime and on Potash (POT).Both pulled back sharplybefore earnings and I wassold out for a loss. In late

2007 I had been entering thestock market on strengththrough mutual funds in my401K and leaving onweakness when downtrendsbegan. Due to the weaknesson January 4, Iwent to cashin my 401K. Bad newsseemed imminent on CNBCand fear was in the air. Thetechnical price action wasweak day after day. Themarket was far below itshighs, along with all the

previoushotstocks.

On January 4, CNBCwas explaining the hugeoutflows of money frommutual funds and stocks intosafer havens. This was theday I decided to vote alongwith the herd and cash in allmy accounts. This proved tobe the most profitabledecision of myinvesting/trading career. HadI stayed in the markets or

attemptedtobottomfishbackinmyaccounts,Iwouldhavelikely melted down by over50%. I did not return tostocks until March 2009,whenonceagainIfeltIhadamargin of safety and wouldstart dollar-cost averaging. Istarted moving my capitalback into mutual funds in25% increments. I wasquickly scared out and lostthe opportunity to catch thebottom. I was a Darvas

investor by then and justcould not bringmyself to gointoabearmarketatanylow.I did not reenter in anyaggressive way with my401K until the Dow was at9500.IfoundnovalidDarvastrades or safe investments in2008 and2009, and so I daytradedformostofthetimetoreduceovernightrisk.

IbelievemysuccessliesinthefactthatIwalkedaway

with over $250,000 frommy401K, exercisingmy optionsand safely trading mybrokerage account. From2003 to 2007 I returned anaverage of over 20% in my401Kaccount;in2008-2010Iearnedreturnsof3%to4%ininterest onmy accountswithno draw-down in equity. Soplease, please, never letanyone tell you that it isimpossible to time themarket. There is a business

cycle and stocks go up anddown. There are recessionsand depressions when stocksare annihilated. Educateyourself:buyinuptrendsandsell in downtrends. If anInternet bubble pops, ifterroristsattacktheU.S.,orifthe real estate marketcollapses, for goodness’ sake–gotocash!

Chapter 8: Winningthe Game: So youwant to trade likeNicolasDarvas?

Ifyouwant totradelikeNicolasDarvas, youmust bewillingtofollowhisrulesandprinciples.Oneofthekeystohis successwashis ability to

follow his rules and not hisego.

Disciplineisthekeytoatrader’ssuccess,andatradingsystemisonlyasgoodasthetrader who follows it. Mostdisciplined traders makemoneybecausetheyhavetheabilitytofollowasystemthatgivesthemanadvantageoverthe market. Undisciplinedtraders usually lose most oftheir capital by taking too

manylargerisks.Evenifyouwin for a while, if you takelarge risks, one bad tradecould ruin you if you do notcut your losses when yoursystem confirms you arewrong. So if you want totradelikeNicolasDarvasyoumust follow his system, bedisciplined,andavoidmakingupyour own rules if you areforcedtotakealoss.

Darvas had the nerve to

buyastockasitbroketonewhighs.Thisiscountertomostpeople’s instincts who wanttobuylowandsellhigh.Thetruth is that during a bullmarket, a stock that isrocketing up because it isbeing acquired by mutualfunds, hedge funds, orinsiders may not give you asecondchance tobuy itbackatalowerpriceuntilaftertheuptrend is over and it beginsto be sold off – whether

because of a change in thefundamental earningsexpectations of the companyor due to a technical top andsubsequent price collapse.But the key is to buy it themoment itbreaksout;donotchase it if you miss thisbreakout. That is why it isimportanttosetbuystopsthatmakethatdecisionforyou.

In his books, Darvasgives examples where he

added to a position after abreakoutwhile the stockwasstillintheboxitbrokeinto.Ifastock is ina$95/$100box,then breaks $100.01 andralliesall theway to$105, itis safe to add to your initialposition of $100.01 at $101and$102,aslongasthestockdoes not fall back under$100. In this example youstillneedtosetyourstoplossat$100because that is a sellsignal, since the stock falls

back into a lower box. ThekeyisthatDarvaswasatrendtrader who bought intostrength the moment a stockovercame all of the willingsellers at an old price andwho bought at the pivotalmoment when buyers werewilling to buy at a higherprice.

NicolasDarvasremovedhis ego from investing bytradingwhen themarketwas

closed.Hefreedhimselffromhaving to make decisionsunder the pressure of a livemarketandmovingprices.Heexamined the market pricesandvolume throughBarron’seach week when the marketwas closed.His stock brokeralsosenthimdailyquotes sohe knew when he wanted tosetabuystopforastockthatwas ready to break out to anew price box ormove up atrailing stop after one of his

holdingswent to a new highinanewbox.Darvasdidnotdowellwhenheattemptedtotrade live during markethours or at brokerage houseswith other traders, where hewasswayedbytheiremotionsto buy too late out of greedandselltoosoonoutoffear.

You have a hugeadvantage over the marketwhen you make yourdecisions when you are

completelyrationalandwhenthe market is closed. Inessence, your automaticorders are making thedecisionsforyou.Youcanbesuccessfulinthemarketwhenyour system isdictatingyourtrades and not your ownopinions. Darvas was a rule-based trader who used asystem.Itisverydifficultfora person to outperform themarketconsistently,buttherearemanysimplesystemsthat

outperform the market andare profitable. The Darvassystem is one that has beenprovenovertime.Hissystemwas one of the inspirationsfor William O’Neal, thefounder of Investor’sBusinessDaily and theCANSLIM system. Mr. O’Nealran many historical tests onthegreatestwinningstocksofall time, and they wereDarvas-type stocks. TheDarvas system puts you into

stocks that can double from$50ashareto$100ashareasthey break to new highs andkeep you in until the run isover.

Nicolas Darvas was atechno-fundamentalist andlikedhis stocks to be in newand exciting industry groups.He preferred the stock ofcompanies that created hugeearnings expectations for thefuture and that created

excitementinthepossibilitiesof unlimited growth.He alsolikedtoputhismoneyonthebest company in that group,so longas the technicalpriceaction was breaking into anew all-time high onincreasing volume. This wasnotalwaysthecase.Ifastockstarted running up on heavyvolume and breaking newpriceboxes, thenDarvashadno problem joining otherbuyers even if he did not

know why it was rocketingupwards.Heletthepriceandvolume of a stock tell itsstory. He did not attempt to“predict the market”; he didwhat the market told him todo. Stocks that wereincreasing to new highs onincreasedvolume toldhimtobuy. A stock sputtering andfalling into an old price boxtold him to sell because themarkets had lost interest inthatstock.

Darvas tried not haveopinionsregardingastockorthe market. He designed hissystemtoprofitfromthewaythemarketworkedratherthanfrom his opinion of how itworked. He was successful:Throughhissystemheearnedover $2 million in profits in18 months, and his systemautomaticallysoldhimouttolock in profits before theragingbearmarket tookholdafterhehadmadehisfortune.

Some of the stocks he heldduring his huge winningstreakwentdown50%,60%,70% or more after he soldthem. His system furtherprotected him since it wouldnotallowhimtobuyanythingwhen no new highs in pricewere being made. I took theDarvassystemtoheartandittold me to go to cash onJanuary 4, 2008, which likeDarvas enabled me to keepmy bull market profits and

savedme themental anguishof the next two years whenthe Dow Jones IndustrialAveragesunkfromitshighof14,164onOctober9,2007,toanincrediblelowof6,440onMarch9,2009.

Youmust be aggressiveinbullmarketsandcashininbearmarkets.Youhavetobeanxious to buy hot stocks asthey break to all-time highs,andyoudothisbysettingbuy

stops.Youhave to stop yourlosses with automatic stoplosses when you are wrong.You have to be able to letyour winners run until theystop running higher. Youhave to search for Darvas-type stocks in Investor’sBusiness Daily, on theInternet via stock screeners,oryoumighthearaboutthemonthenews.Whenyoufindaproduct that will change anindustry, a person’s life, or

the world, you may havefoundaDarvasstock.

Chapter9:Rules

1.Identifystockstradingvery close to their 52-weekhighs. (InDarvas’ thirdbookhe changes from all-timehighsto52-weekhighsduetothe severity of the bearmarket of his time. This canalsoapplytoourtime).

2. Identify stocks thatare at least double their 52-week low from their current52-weekhigh.

3.Back check to ensurethatthecurrent52-weekhighis also the stock’s all-timehigh. (Be sure that you takeintoconsiderationstocksplitswhen checking for the all-timehigh).

4.Lookatchartsorprice

histories to identify the pricebox they are in. If the 52-weekhighwas$95butinthelast two weeks the stocktradedaslowas$90,thenthepriceboxwouldbe$90/$95.

5.Thestockneedstobetrading on increasing volumeover itspastaveragevolume.If the average volume was250,000 shares over the lastmonth when it traded at $90to $95, then suddenly jumps

to over amillion shares as itbreaks through$95, thenyouhave a Darvas stock. If itbreaks through thatnewhighon lower than averagevolume–thisisadangersignandnotaDarvasstock.

6.Intheaboveexample,youwouldpurchasethestockat a breakout above $95. Ifyou were waiting to buy atthe breakout from the$90/$95box,youwouldseta

buy stop at $95.01. If thestock broke out above yourbuystopthenyouwouldsetastop loss at the point of thebreakout;yourstopwouldbeplaced at $94.99. If yourstockisaDarvasstockthenitshouldnotretraceintotheoldbox; it should establish itselfin a new box over the nextfewdayssuchasatahighof$103andalowof$97.Aboxcan be identified by threedays of resisting a new high

or three days of findingsupport at a new low. Youmay be stopped out severaltimesintradesbeforeyougetthe one trade where supportholds and a new uptrendbegins. Do not getdiscouraged.Yourstoplossisyour insurance against largelosses. Darvas was stoppedoutmanytimesbeforehegothold of the monster stocksthatmadehimafortune.

In Darvas’ second bookhe recommends that a stockpricemust exceed the top ofits box for three consecutivedays before buying. In histhird book he recommendsbuying after the retracementon the second breakout. Thishas caused his readers muchconfusion however this issimply Darvas’ attempt toadjust his system as hecontinues to investand learn.I have found his original

system of buying at initialbreakouts to be the mostprofitable. In raging bullmarkets you seldom get asecond chancewhenmonsterstocks break loose at a highbeforeearnings.

7. If the stock performscorrectly you will reset andtrail your loss behind it. If astockthenentersa$104-$109box your stop loss will bebelow the bottom of the last

boxat$102.99.

8. Darvas was veryaggressive and would makeuse of all of his availablecapital and margin when hetookpositions.Thekeytohisriskmanagementwas thathewas very disciplined andalways made physical stoplosses that acted as a triggerso that he could control hislosses. Today, there is adanger that news will break

whenthemarketisclosedandcauseyourstocktogapdownand miss your stop the nextmorning. In this case, yourstop loss should be triggeredattheopenthefollowingday.Whilethiswillresultinmorelosses than planned, on theupside, good news ‘afterhours’ about your stock’scompany could cause yourstock to gap up into a newbox.

Ifyouaregoingtotradelike Nicolas Darvas, it iscrucial that you follow hissystemandneveroverridehisstop loss policy. It is yourinsurance policy to preventyour ruin should somethinggoterriblywrongandatrendin the stock that you ownreversesviolently.

9. In his third bookDarvas recommends amaximumstoplossof10%in

any stock purchased,regardless of the price boxrange. He also recommendsnot giving back more than20% in profitswhen you arein a winning position. Thisadvice is necessary since theDarvassystemdoesnotallowforjudgment.

If you decide to trade avolatile stock, youmay havetosetastopat thebottomofits current box to allow it

room to work. I wouldstrongly advise againstinvesting in any stock forwhichyoucannotsetthestopclose to the breakout point.Like Darvas, at times youmay also decide to buy astock when it is close to thebottomofitsboxandsellitatthetopforaniceswingtrade.Swing tradingwillmakeyoumoneymost of the time, buttheDarvasmethodinarisingmarket can make you rich.

When realmoney is at stakepeoplehate to lock in a loss,preferring to hope that thestock will rebound. Do notmake this mistake: Cut yourlosses.

10.TheDarvasrulesareprinciplesthatcanbeusedinall markets and in alltimeframes.

-Setbuy stops thatwillautomatically buy at

breakoutstonewhighs

-Setstopstolimitlosses

- Trail stops to lock inprofits

- Buy only the hotteststocksinmajoruptrends

- Buy into strength; sellintoweakness

- Follow your rules not

yourego

-Removefearandgreedfromyourmarketactions

-Onlyinvestwhenyoursystemgivesabuysignal

- Stay away fromopinions; follow marketaction

Conclusion

I wrote this book to letreaders know that you canmake money in the stockmarket. Your 401K is avehicle to wealth creation. Itis a good idea to buy stocksas they make all-time highsfor the first time and to stayaway from stocks making

new lows. If you want totrade the Darvas method,pleasewaituntilthenextbullmarket. Pick the stocks thatwillchangetheworld.Watchandstudythepersonalityofastock’s movement. Beaggressive and buy when itgoeshigher;beafraidwhenitfails to make new highs andgoes lower through thecurrentpricebox.

401K Investors: If the

Darvas method is too scaryfor your sensibilities, theninsteadofbuyandholding,atleast usemoving averages toidentify trends. IfyousimplysellwhentheS&Pdipsbelowits 200-day moving averageand buy as it goes above its200-daymovingaverage,youcan double your investingperformance over the longterm.Thisalso takesyououtof bearmarkets early on andputsyoubackinbullmarkets

atanearlystage.

Never let anyone tellyou that it is impossible totime themarket. Ihave it foradecade,NicolasDarvasdidit, professionals do it everyyear,andsocanyou!

RecommendedReading

How I made$2,000,000 in the StockMarket

By: NicolasDarvas

WallStreet:The

OtherLasVegas

By: NicolasDarvas

You Can StillMakeitintheMarket

By: NicolasDarvas

An AmericanHedgeFund

By:TimothySykes

TrendFollowing

By:MichaelCovel

TableofContents

TitlepageCONTENTSIntroductionChapter 1:WhowasNicolas

Darvas?Chapter2:Understandingthe

GameChapter 3: Thinking like

NicolasDarvasChapter4:EnteringtheGameChapter 5: Learning from

LosingChapter 6: How to Manage

RiskChapter 7:MyDarvas Stock

TradesChapter 8: Winning the

Game: So you want totradelikeNicolasDarvas?

Chapter9:RulesConclusionRecommendedReading