Box Theory

I am convinced that knowing how to calculate support and resistance is the key piece of the puzzle of speculation. Most experts disagree with me. They think oscillators, moving averages, chart patterns, cycles and other tools which incorporate the "time" element should be a speculator's main tools. All I can tell you is that I haven't used moving averages or oscillators for years (but I do use time in the way George Lindsay pioneered.)

In any case if you care about support and resistance then you need to use only one tool. I call it the Box Theory. I first read about it in Nicolas Darvas' book "How I Made 2 Million Dollars in the Stock Market". (This is a great read and I recommend it - Darvas' book caused the American Stock Exchange to change its rules about stop orders after the book became popular in 1961.)

Now Darvas was a dancer and he developed his box theory through trial and error. He didn't explain it very well in his books. In this blog I try to illustrate its use through many examples. But if you want to become a skilled box theory practitioner you have to start working out lots of examples and use the theory in real time. Everything is obvious in hindsight, but a speculator makes his money by peering into the future where nothing is obvious.

What Darvas called "boxes" are more commonly referred to as trading ranges. But there is one crucial difference. A box has definite, precise boundaries while a trading range usually does not.

There are three basic empirical principles which make the box theory useful. First, box sizes change only slowly and can be calculated by looking at recent price action. Second trends typically evolve as a series of boxes of similar size stacked on top of one another. So in a downtrend the bottom of one box becomes the top of the next one while in an uptrend the top of one box becomes the bottom of the next one. Finally, a trend usually stops temporarily when it encounters the top, bottom or halfway point of a box, while reactions against the trend usually end at those same points (and sometime at the 1/4 or 3/4 points of a box).

I don't have any other materials on the box theory that I can share with you or refer you to. But I do think you can learn the main idea by looking at the examples I post on this blog and then working out more examples on your own. Good Luck!