How I Made $2 Million in the Stock Market

1. Start with small investments and learn from mistakes

"I was the perfect pattern of the optimistic, clueless small operator who plunges repeatedly in and out of the market."

Initial struggles. Darvas began his stock market journey with little knowledge, making impulsive decisions based on tips and rumors. He invested in Canadian penny stocks and suffered numerous losses. These early experiences taught him the importance of education and caution in the stock market.

Learning process. Through trial and error, Darvas realized the futility of relying on hot tips and unfounded advice. He began to develop his own system, starting with small investments and gradually increasing his positions as he gained confidence and experience. This approach allowed him to learn from his mistakes without risking significant capital.

2. Develop a systematic approach based on technical analysis

"I decided that if I studied price action and volume, discarding all other factors, I could get positive results."

The box theory. Darvas developed his "box theory" by observing stock price movements. He noticed that stocks tend to move within defined price ranges, which he called "boxes." When a stock broke out of its current box and established a new, higher range, it signaled a potential buying opportunity.

Volume analysis. In addition to price action, Darvas paid close attention to trading volume. Sudden increases in volume, especially when accompanied by price increases, indicated growing interest in a stock and potential for further gains. This combination of price and volume analysis formed the core of his technical approach.

3. Avoid emotional decision-making and stick to your strategy

"I had to bring my emotions—fear, hope and greed—under complete control."

Emotional detachment. Darvas recognized that emotions were often the downfall of many investors. He worked to develop a detached, clinical approach to trading, treating it as a business rather than a gamble.

Disciplined execution. By sticking to his system and avoiding impulsive decisions, Darvas was able to maintain consistency in his trading. This discipline helped him avoid common pitfalls such as selling too early due to fear or holding onto losing positions due to hope.

4. Use stop-loss orders to limit potential losses

"I decided to give 'on-stop' orders to buy at a certain figure with an automatic 'stop-loss' order on them in case the stock went down."

Automatic risk management. Darvas implemented stop-loss orders as a key component of his strategy. These orders automatically sold a stock if it fell below a predetermined price, limiting potential losses.

Preserving capital. By consistently using stop-loss orders, Darvas ensured that no single trade could significantly deplete his capital. This approach allowed him to stay in the market and capitalize on future opportunities, even if some trades didn't work out as expected.

5. Focus on high-volume, upward-trending stocks

"I would just jog along with an upward trend, trailing my stop-loss insurance behind me. As the trend continued, I would buy more."

Momentum investing. Darvas concentrated on stocks that were already showing strong upward momentum, both in price and trading volume. This approach helped him ride powerful trends and avoid struggling with underperforming stocks.

Pyramiding positions. As a stock continued to rise and break into new "boxes," Darvas would add to his position. This strategy allowed him to increase his exposure to winning trades while maintaining his risk management principles.

6. Combine technical and fundamental analysis for better results

"I would marry my technical approach to the fundamental one."

Techno-fundamentalist approach. Darvas evolved his strategy to incorporate both technical and fundamental analysis. He used technical indicators to identify potential investments and timing, while also considering fundamental factors such as earnings growth and industry trends.

Focus on growth industries. By targeting companies in rapidly expanding sectors like electronics and aerospace, Darvas positioned himself to benefit from long-term growth trends. This combination of short-term technical signals and long-term fundamental outlook improved his stock selection process.

7. Maintain distance from market noise and rumors

"My ears were my enemy."

Information overload. Darvas discovered that being too close to Wall Street and constant market chatter could cloud his judgment and lead to poor decisions. He found that he performed better when trading from afar, relying solely on price and volume data.

Isolation strategy. To maintain his objectivity, Darvas developed a system of trading via telegrams while traveling the world. This physical and informational distance helped him focus on his strategy and avoid being swayed by rumors or short-term market fluctuations.

8. Be patient and allow profits to grow

"You cannot go broke taking a profit."

Letting winners run. Darvas learned to resist the temptation to sell stocks quickly for small gains. By holding onto his winning positions and using trailing stop-loss orders, he was able to capture substantial profits from major market moves.

Overcoming fear. Many investors sell too early due to fear of losing paper profits. Darvas trained himself to overcome this instinct by focusing on the ongoing behavior of the stock rather than the size of his unrealized gains.

9. Adapt your strategy as you gain experience

"I slowly came to see that though I was becoming a diagnostician I could not be a prophet."

Continuous learning. Darvas constantly refined his approach based on his experiences and market observations. He wasn't afraid to modify his strategy when he identified areas for improvement.

Flexibility. While maintaining core principles, Darvas adjusted his tactics to suit changing market conditions and his growing capital base. This adaptability was crucial to his long-term success in the dynamic stock market environment.

10. Reinvest profits wisely to compound returns

"If I could make half a million, what was to stop me from making two, three or even five million?"

Scaling up. As Darvas' profits grew, he reinvested them into larger positions in high-potential stocks. This compounding effect accelerated his wealth accumulation.

Risk management at scale. Even as his investments grew larger, Darvas maintained his disciplined approach to risk management. He continued to use stop-loss orders and diversified across multiple high-performing stocks to protect his growing capital.

Last updated: August 22, 2024