Book review: How I Made $2 Million in the Stock Market: The Darvas system for stock market profits by Darvas Nicolas

Disclaimer: this review is more of my ramblings than an actual review of the book.

I’m not gonna link the amazon page because I haven’t setup the affiliate program, anyway I’m more than sure you can find the book. Do I recommend it? No, not really. However!

I learned something from reading the book, so even though I don’t quite recommend it, it’s worth a review. But first, a summary.

The book itself is an easy read, almost nothing technical in it, and the methodology the author describes is very basic and very old. The author Darvas Nicolas talks about stop losses being crucial to him – well, stop losses exist on every platform, and there is the (minority?) opinion that they aren’t even that useful, even detrimental. Someone presented this argument more convincingly than I can: Let’s say you buy in XYZ at 50, and set the stop loss at 45. Let’s say it goes up to 70, then drops to 60. You’re holding, right? Now let’s say you bought in instead at 70, setting stop loss at 63. It drops to 60 and you get closed out of your position. Well, in the first case you’d not close the position, and in the second case you would, and it’s just random because the reason for both should have been the same, and behavior should have been the same (hold). Having a stop loss will just close you out, possibly at the worst time.

This part “at the worst time” is more concerning to me and maybe I can explain this argument better. The powers that be (cough hedge funds cough), especially with payment for order flow (PFOF) will look at where people’s stop losses are, drop the price to that level making bank on the way down, riding fear, wipe a bunch of people’s positions out, then buy in and ride the wave back up. The wave up is FOMO, fear of missing out. The point is, certain actors will create volatility just to stop naive traders out of their positions. Think about that the next time you enter a stop loss order.

So Darvas Nicolas talks about that, and resistance levels. For example if XYZ moves between 40-50, he calls it a box, and if XYZ breaks out to, say, 52.5, the expectation is that it’ll continue trending upward. Same for downward movements: if it tanks to 37.5, you expect it to continue trending down for a while. And between 40-50 it’s like fair game. This is nothing new, and “trend following” is a pretty solid concept in my opinion. A stock that moves up will continue moving up, and a stock that’s moving down will continue to move down. You are much more likely to benefit from trend following, than trying to time the trend reversal. End of summary.

Now, the one Insight that I got from reading this book. The author talks about his mistakes and losses, and that is naturally interesting. He tells us that when he was too close to Wall Street, all the distractions and bs and the news made him unable to make good decisions. He was remote before, right, and he used to get delayed news and numbers only, over telegraph. That was in 1950’s, by the way. So he ended up not talking to any professionals and only communicate with them via telegraph while living in New York. And once he setup his data feeds thusly, he claims he was able to get back into a good headspace and make better decisions that were eventually profitable to him.

This resonated with me. You can’t be too close to the source, or too involved in the data. Or rather, being close to the data is fine, as data is impartial, but the interpretation of data, the news, analysis, commentary, what people talk about – that will influence your decisions in ways you may not even realize, and not in a good way. So staying away from distractions and really, really avoiding some  harmful information sources, is the one takeaway I got from this book. But of course, I knew that already. I think of information streams as addictive and to be avoided, as I think of tobacco as addictive and to be avoided. The book exemplified this idea, across a dozen or so pages.

That is all : ) Again, the book is a light novel to read in one sitting. The preferred analogue is “Reminiscences of a stock operator” by Edwin Lefevre, that one I recommend. Edwin (Jesse Livermore really) also talks about distractions and being drowned in his news sources, by the way.

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