When to buy stocks and when to sell
August 27th, 2007
When to buy stocks and when to sell
You may have heard of a dancer-turned-investor named Nicholas Darvas who startled Wall Street with his How I Made $2,000,000 in the Stock Market. The book distinguished itself in the simplicity of its approach. He dealt only in stocks which were “in tune with the jet age,” growth stocks. He selected only those which appeared to be developing trading activity and strength. No attempt was made to buy a stock at the bottom; instead, he took action only after it had begun to rise.
He watched his selected stocks and kept charts, which consisted of a series of “boxes.” If a stock should move up to a higher box and stay there, he would buy it. If it should move down to a lower box, he would sell. For instance, if a stock had fluctuated in a 55 to 60 range, that would be its first box. Then, if the stock should move out of that range to fluctuate in a range of 60 to 67, that would be his next box. If the stock should demonstrate its ability of staying in that box, he would buy it, and place a stop-loss order to sell a few points below the buying price. If the stock should rise, he would raise the stop-loss price. If it should fall through the stop-loss price, he would be automatically sold out.
Mr. Darvas called his method “Techno-fundamentalism,” but it is essentially a technical approach based on the idea that market is its own indicator. It is “fundamentalism” only in the sense that he used a daily market average of industrial stocks as a basic indicator of the stock market trend. Stock prices may indeed be determined by fundamental values in the long run, but he concerned himself only with what the market was doing at the moment.
Behind this seemingly rather simple approach is a much deeper theory which sees the price of any stock as a reflection, at a given moment, of the sum total of hopes and fears of investors and speculators. And this reflection is considered registered in the price of that stock at any given moment. The price of the stock itself may then serve as a stimulant for buying or selling.