Darvas Box
Definition:
The Darvas Box is considered by some to be a trading system wrapped up into a single indicator. The indicator uses a series of “states” to determine the upper and lower lines of a box by finding highs and lows.Formula:
The calculation of a Darvas box is complex and is based on a series of states, and a box is not formed until all states have been met. Essentially, the Darvas Box requires the successful “finding” of a high and low over a set of three periods for each. Bar charts or candlestick charts are required because the high and low of a period is needed for the calculation.
State 1 can start with any bar, and establishes the high (or BoxTop, which is simply a horizontal line crossing the high).
A bar moves to State 2 when the period’s high is lower than the State 1 period, otherwise it remains in State 1 and forms a new BoxTop.
A bar moves to State 3 when the period’s high is lower than the State 2 period, otherwise it returns to State 1 and forms a new BoxTop. In State 3 a BoxBottom is formed, which is simply a horizontal line crossing the low.
A bar moves to State 4 when the period’s low is higher than the State 3 period, otherwise it remains in State 3 and forms a new BoxBottom. (If the period’s high is higher than the BoxTop, form a new BoxTop and return to State 1.)
A bar moves to State 5 when the period’s low is higher than the State 4 period, otherwise it returns to State 3 and forms a new BoxBottom. (If the period’s high is higher than the BoxTop, form a new BoxTop and return to State 1.)
Only after State 5 is reached is a box formed on the chart.
Interpretation:
Some traders also use the Box as a stop-loss by setting it as the BoxBottom in a long position or the BoxTop in a short position (or a percentage above/below the BoxBottom/BoxTop).
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