Introduced by Nicholas Darvas and named after the developer, the Darvas Box indicator can be a great forex trading tool for technical analysis. The Darvas Box Indicator was introduced in the 1950s, but is still used by traders who are looking to gain an edge on their strategies. In this guide, I will take a look at what the Darvas Indicator is and how it can be used to trade forex.
What is the Darvas Box Indicator?
The Darvas Box Indicator is a breakout trading indicator which follows trend. It is known for capturing the highs and lows of the price of the instrument on which chart it is inserted, after which it plots a semi-dynamic price channel. The price volatility of the asset being traded greatly affects the movement of the price channel which the indicator plots.
Furthermore, this price channel captures the periods of consolidation of the market and stays flat when the market is ranging (when price is moving sideways). When the indicator acts in this way, causing the price channel to turn flat, we look at this as a breakout box. When this happens, we wait for price to break out of the box.
In addition, this indicator which specializes in breakout trading, helps its users to be able to easily locate significant tops and bottoms in a chart. With this, the user can then proceed to draw trend lines manually. The Darvas Box Indicator gives traders the opportunity to trade trend line breakouts in line with support and resistance breakouts for extra confirmation.
Darvas Box Strategy
The Darvas Box Strategy involves both automatic and manual efforts. The automatic effort is that which is done by the indicator already which includes providing consolidation boxes, identifying highs and lows, giving breakout signals, whereas the manual effort includes plotting trend lines, reading the indicator properly, picking your trades accordingly.
Depending on the rate of volatility of the price of each period captured by the indicator, the Darvas Box Indicator plots the price channels. Note that the SnR (Support and Resistance) lines do not move parallel to each other. Just like how Bollinger Bands does, the width of the channel created by the Darvas Box Indicator also squeezes and expands. Always watch out for the price action that comes out of the Darvas channel because such price could be a potential price breakout. When your breakout is confirmed, you can then pick your trades. If it’s a downward breakout, you would want to pick a sell trade. On the other hand, if it is an upward breakout, you would want to pick a buy trade.
This forex strategy helps you spot highs and lows in your chart and enables you manually connect them with your trend lines. When price breaks out from both the Darvas channel and the trend lines, we could have a good setup for entry.
Buy Signal
The following should be your checklist for a buy trade:
- When price goes above the high of the Darvas channel.
- When price breaks the resistance of the trend line.
Once these two events occur, you could do the following:
- Open a buy position just after the bullish breakout is confirmed.
- Set your stop loss just below the Darvas channel support.
- Set your take profit at the nearest resistance zone.
- For good risk management, you mgiht only pick the trade if your risk to reward ratio is 1:2 or more.
Sell Signal
The following should be your checklist for a sell trade:
- When price goes below the low of the Darvas channel.
- When price breaks the support of the trend line.
Once these two events occur, you could do the following:
- Open a sell position just after the bearish breakout is confirmed.
- Set your stop loss just above the Darvas channel resistance.
- Set your take profit at the nearest support zone.
- For good risk management, you mgiht only pick the trade if your risk to reward ratio is 1:2 or more.
Darvas Box Pros & Cons
Pros
- This strategy can catch some good moves when the market is in a constant trend.
- Even without technical analysis experience, breakouts are easily spotted.
- Darvas Box Indicator is a very effective tool for identifying consolidating markets.
Cons
- It’s dangerous to open buy positions in the midst of a bearish market especially one that is in a long-term low, and vice versa.
- Position of stop loss can be too far, making it difficult to achieve a good risk to reward ratio.
- Adding more positions at each breakout in the same trend can be very risky.
- This strategy is not good for sideways markets.
Conclusion
Overall, the Darvas Box Indicator is a great tool for technical analysis and is easy to understand even by inexperienced traders. It provides actionable buy and sell signals, and makes it quite easy to ride trends, provided you time the entry well. Though it has its risks as already mentioned in this article, the Darvas Box Indicator can detect potential price reversals and shows users where to enter their trades. This indicator can help a trader decide if they want to go long or short on a currency pair, but the trader needs to pay keen attention to risk management. I would make sure I cut my losing trades short and let winning trades run. I might even use a break even to lock in good trades and try to maximise the move by using a trailing stop. If you like the sound of the Darvas Indicator, you can always give it a try on a demo account to begin with and see how things go.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
