The Darvas Boxes Indicator For MT4
Originally developed in 1956 by Nicholas Darvas, this indicator is used to employ a breakout momentum strategy. When he developed the strategy, he turned a $10,000 investment in the $2 million over just under 19 months. Originally, the Darvas Box used both fundamental analysis to determine which securities to buy or sell, and then technical analysis to decide when to trigger a trade and when to exit the very same trade. Today, the Darvas Boxes Indicator For MT4 find plenty of fans in the Forex world. Part of what makes the indicator so popular is its simplicity in execution.
The most important thing to understand about the Darvas Boxes Indicator For MT4 is that it should be used in a trending market. Traders using this indicator should consider that a secondary indicator to determine whether a market is trending, or range bound can be quite useful. (It’s not that uncommon to see this indicator used in conjunction with a moving average for example.)
Originally, Darvas looked for stocks that were trading in a narrow price range and had a new low price that had held for three consecutive days. However, this can be used on any timeframe although as with most things technical analysis related, the higher the timeframe the more reliable the signal. At the top of the box, he drew a line that represented the highest price that the security reached in the previous move that had also held for at least three days. Just below is an example of the Darvas Boxes Indicator For MT4 on the USD/CNY currency pair.
How to use the Darvas Boxes Indicator For MT4
As a general rule, Darvas would use these boxes as a sign of breaking out of consolidation in a larger long-term trend. However, the Darvas Boxes Indicator For MT4 has been modified in order to show both buy and sell signals. In other words, a low that holds for three consecutive days and then gets broken below is in fact a sell signal. You will notice that there is nothing in this indicator to suggest where and when you should take profits. In that sense it is a slightly unfinished indicator and is almost always to be used with something else.
A little bit of common sense can go a long way when using the Darvas Boxes Indicator For MT4, as it simply paints the consolidation area on your chart. For example, not all signals are going to be created equal. Notice on that very same chart the two potential setups marked “1” and “2”, and what happens next. The first thing that should come to mind immediately is that the box drawn for area “2” is very large. At this point, the trader needs to decide what the potential risk or reward of the trade is.
In general, when a trader receives a signal with the Darvas Boxes Indicator For MT4, they use it as an entry signal more than anything else. Some traders will put the stop loss on the other side of the box, in this case just below both of the boxes marked on the chart. Obviously, the first set up is much more palatable than the second, mainly because the risk is much smaller.
A few considerations about the Darvas Boxes Indicator For MT4
There has been significant debate on the success of Darvas in the stock market. When he employed this system, the market was in an extraordinarily bullish run, benefiting from the postwar boom. This is typically where the skeptics “cry foul” with the efficacy of the indicator itself. Most traders will find it as an excellent tool to recognize a breakout. As a general rule, most traders like a 1:2 risk to reward set up, so many will simply aim for twice the height of the box. In this case, when a box is drawn by the Darvas Boxes Indicator For MT4, a measurement of the height of the box is the first step, and then multiplying by at least two in order to signal a target is very common.
Remember that false signals can and will happen, so again it is fairly rare to see somebody use just this indicator on its own to determine when to place a trade. In fact, it is somewhat rudimentary considering that all it is looking for is a high or low that has held for three candles. It’s another play on simple support resistance. While a useful tool, the Darvas Boxes Indicator For MT4 is simply one piece of the puzzle and not a standalone methodology.