20 Darvas Trading System Rules And How They Work
Here are the key lessons Darvas learned that became features of the Darvas trading system:
1. Have a defined method, don't just go with what sounds or looks good
2. Admit ignorance and ask questions. Darvas didn't want to look ignorant when talking to his broker, so he did not ask questions when he didn't understand. Always seek understanding
3. Advice from people should never be substituted for good research
4. Recognize your own skill level. False over-confidence can ruin you fast.
5. Know your breakeven. Understand your costs and make sure that they are factored in
6. The opinions and recommendations of analysts and experts are still just opinions and will likely be subjective, biased and conflicting.
7. Be wary of "valuations". These can be extremely complex assessments and are often based on indicators that are neither clear, relevant or reliable.
8. Stay within your area of expertise. Darvas quickly learned that the unlisted securities market was only for experts, which he was not. Upon realizing this he quickly got back to what he knew.
9. Study. When you find that one thing works better than another, study the better one to further you're ability to utilize it.
10. Ask "Why?" It is from understanding WHY something works that you can make the most of it. Seek understanding
11. Look for strength. Darvas sought strong industries and then looked for strong companies within those industries.
12. Do the right thing. When you do what you know to be right, it not only serves you well, in the long run it keeps your integrity and self-esteem in tact.
13. Protect yourself. Know your risk going in and limit it. Darvas' use of the stop-loss order at a well-conceived and pre-determined price was the very foundation of his success. When he got away from using it, his success rate plummeted. When he utilized it, his system worked as intended.
14. The failure of Jones and Laughlin to produce a profit even after closely examining the financial indicators and the valuation of the stock had showed him that the fundamental approach was unreliable. Darvas learned that he needed to base his decisions on technical facts.
15. Write rules for yourself as you discover what affects your trading. It doesn't have to be limited to your system for selecting stocks or choosing entry and exit points. Anything that affects your trading, like how you'll handle specific to your situations or influences, how you'll deal with potential mistakes, etc. If it matters and requires that a decision be made, right a rule so that you always make the right choice - give yourself the guidelines to stick to what works and to avoid what doesn't.
16. In order to take the largest profits possible, let your tools do their job. Darvas found that of all the methods he tried to remain disciplined and unemotional was to physically distance himself.
17. Check the market "mood" to give your trading context. Darvas used the Dow Jones average specifically for this purpose, so that when the overall markets were bearish, he could understand the price behavior of the stocks he chose.
18. If the overall market conditions are unfavorable for trading with your chosen system, stop trading until conditions are favorable again.
19. Make use of automatic orders, both buy and stop-loss to ensure the right timing. Darvas did this out of necessity since his travels did not allow him to watch over the markets daily, but it forced him to thoroughly think through every trade and determine his entry and exit points - before entering the trade. By making them automatic orders, this aided his discipline in execution tremendously.
20. Practice made the Darvas trading system perfect. Darvas took advantage of his circumstances and time freedom to practice his method. In doing so, it allowed him to build further confidence in it and reinforce his discipline.
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