Book Review – How I Made $2,000,000 in the Stock Market– Nicolas Darvas

This book explores the amazing journey of Nicolas Darvas to turn $25,000 into $2,000,000 in 18 months in the 1950s. Nicolas Darvas describes how he went through various stages and how he struggled to grasp the technical and fundamental aspects of the markets. This experience eventually led him to develop the Darvas Box trading system that allowed him to reap the amazing profits he enjoyed while requiring him to invest minimal amount of his time.

In summary, the Darvas Box system uses tight stops of roughly 10% and tries to identify levels from which a stock will bounce based on high volume buyer support. As the stock would move up Darvas would tighten his stop until the market would eventually close his position. He never exited himself as he knew he would not be able to predict the size of the move. While this is an oversimplification of his system and the book goes in much more detail about the actual system, it roughly gives us an idea of his approach.

Darvas called himself techno-fundamentalist which for him meant to choose growth sectors like technology and to leave the rest to the technical analysis of his trading system. He would analyze the markets when they are closed by spending at most 30 minutes looking at prices and ignoring all news.

While many people attribute his success to the amazing bull market that took place when he was investing it is worth exploring some of the factors and assumptions of his system and how they contributed to his success.

1. He made an assumption he will be right 50% of the time and so wanted to exit as quickly as possible when he was wrong and stay as long as possible with the winning stock when he was right. Whether one can make such an assumption is questionable, but the fact is this approach allowed Darvas to come up with a winning strategy. One problem here is that if the assumption did not hold true and a series of losing trades took place in the beginning, his available capital could have potentially disappeared.

2. Darvas was going all in. There was no diversification aside from a 50-50 split between two stocks. This is a high risk high reward strategy which many professional investors may call madness or gambling today.

3.Volumes were not as high as they are today back in the 1950s so the context of his success is not available today due to the different trading environment.

4. His system will potentially fail in a volatile market because the risk of getting stopped increases when large moves take place.

Regardless of all this "How I Made $2,000,000 in the Stock Markets" is a great educational tool for anyone who wants to be successful in financial markets. After all, to be successful one needs to study success!