Terms Beginning With 'd'

Darvas Box Theory

  • January 02, 2020
  • Team Kalkine

Darvas Box system

Every great trader/investor in the history of the markets had a specific method to approach the markets, which eventually led them to create a good fortune, Darvas Box system is one such method. It is a trend following strategy developed by Nicholas Darvas in the 1950s to identify stocks for good upside potential.

This is one of the few methods to trade the markets which uses the combination of both the technical analysis and fundamental analysis for a much more refined decision.  The fundamentals were used to identify the stocks, and technical analysis was used to time the entry and exits.

Who was Nicholas Darvas?

Nicholas Darvas was arguably one of the greatest stock traders/investors during 1950s – 1960s, but surprisingly he was a ball dancer by profession and not a professional stock trader. Even while trading and building his fortune, he was on a world tour for his performances in many countries and took up trading as a part-time job.

In November 1952 he was invited to a Toronto Nightclub for which he received an unusual proposition of getting paid in shares by the club owners.

At that time, all he knew was there is something called stocks which moves up and down in value, that’s it. He accepted the offer and received 6k shares of a Canadian mining company Brilund at 60 cents per share, with the condition that if the stock falls below this price within six months, then the owners would make up the difference.

This was the introduction of a professional ball dancer to the stock market.

Nicholas Darvas couldn’t perform at the club, so he bought those shares as a gesture. Within two months, Brilund touched $1.9, and his initial investment of $3000 turned to $11400, netting in almost three times of his investment. This triggered a curiosity into the stock markets, and he started to explore trading.

Origin of the Darvas Box theory

Initially, he was trading on his broker’s recommendation, tips from wealthy businessmen, he even approached some advisory services or any source that he could get his hands on for the tips, but all led him to losses.

After losing a lot of money, he decided to develop his own theory, and after a lot of trial and error, his observations and continuous refinements he eventually invented his theory “The Box Theory”.

So what exactly is the Box Theory?

Fundamentals Analysis

As stated earlier, the box theory uses a judicious bend of both the technical and fundamentals. Darvas believed that in order to spot a good stock or even a multibagger, there should be something brewing up in the respective sector as a whole or some major fundamental change in that specific company.

Generally, the fundamentals that Darvas used to study were on a broader sector level, and not the company-specific fundamentals. Even for the specific company Darvas used to look from a general perspective like, is the company launching a new product which could be a blockbuster hit. He completely refrained from looking at numbers and financial statements as his initial experiment with ratios and financial statements didn’t yield any good result.

To know more on the three financial statements read:

Technical Analysis

Darvas was a big believer in price action and volume of the stock. He believed if some major fundamental changes were to take place in a company, this soon shows up in the stock price and its volume of trading as more people get interested in buying or selling the stock.

With his observations here realized by just observing the price action, he can participate in the rally which gets triggered by some major fundamental development without actually knowing about the change.

Using the box theory, Darvas used to scan stocks based on rising volume as he needed mass participation in the rally.

Also, he only picked up those stocks that were already rising. His theory is all about “buy high, sell higher” instead of the conventional belief of “buy low, sell high”. After the stock satisfies both the parameters of increasing price and volume with major underlying fundamental change, Darvas looks to enter the stock.

Good read on momentum trading.

How and where to enter?

Major part of the box theory is based on entry and exit levels. To enter a stock, Darvas looked for a consolidation phase preceded by a rally. A consolidation phase is the price action wherein the price moves up and down in a tight range, that is, a non-directional move. He would then mark the high and low of the consolidation phase with the horizontal line, essentially making it a box-like structure, hence the name “Box Theory”.

The high point is called the ceiling, and low is called the floor. Whenever the stocks break above the ceiling, Darvas would look to buy one tick above the ceiling with one tick below floor as a stop-loss point.

Pyramiding

Darvas discovered early on, in order to become successful in the market your winning bets should yield much more profit than the loss in the losing bets. This led him to do pyramiding in his winning trade, which is clearly defined in the box theory.

Pyramiding means to increase the existing position if the stock is going in the favour, which leads to a much higher profit in the winning trades. According to the box theory, the repetition of the entry criterion is the new signal for adding onto the existing position.

In other words, after a position, if the stocks stage the same setup, that is, a consolidation after a rally, then the break above the ceiling of this new box would signal to increase position with the revised stop loss of 1 tick below the new floor.

In any case, whenever the stock falls below the current floor, the entire position would we sold off at once. This is the only exit condition in the box theory, and there is no method of booking profit upfront as Darvas believed in holding on to a rising stock. The only way to book profit is to let the stock to take out the revised stop loss.

Ichimoku Kinko Hyo is a versatile technical indicator used to identify trends, support and resistance, gauge momentum, and to generate buy or sell signals. The name of the indicator translates into “one look equilibrium chart”. Must read: What Is Technical Analysis? The indicator reflects on all of the above parameters by taking multiple averages into consideration and plotting them on a chart, and the interpretation of the chart is factual in nature, i.e., it remains the same irrespective of the time frame. Originally developed by a Japanese journalist – Goichi Hosoda in 1960s, the indicator provides more data points as compared to the traditional candlestick chart, and it could be applied on any type of chart, irrespective to the chart’s own data points, i.e., the chart could be a bar chart, a candlestick chart, or a simple line chart. While at first glance the indicator could seem intimidating and highly technical to novice traders or investors. However, the indicator is relatively easy, and once a trader understands the nitty-gritty of its derivation and implications, it could become quite handy to gauge the market sentiment. Moving Parts of Ichimoku Kinko Hyo The Ichimoku Kin Hyo mainly contains two short-term moving averages- the conversion line (kenkan sen) and the base line (Kijun sen), one medium-term average – Leading Span A (senkou span A), one long-term moving average – Leading Span B (senkou span B), and a historical closing plot – Lagging Span (chikou span). Derivation of Components The conversion line of the indicator is derived by taking the mean value of 9-period high and low. Likewise, the base line of the indicator is derived by taking the mean value of 26-period high and low. The leading Span A is typically the mean value of the conversion line and the base line. The leading Span B is the mean value of 52-period high and low. And the lagging Span is the close plot of 26-period in the past. Cloud 1 – Span A crosses above Span B. Cloud 2 – Span A crosses below Span B. In the definition, we mentioned that the Ichimoku Kin Hyo is factual in nature; thus, in the derivation section, we have used PH and PL notions. The period here could take any from, such as daily, weekly, monthly. So, if we are applying Ichimoku kin Hyo on the daily chart, the PH and PL notion would consider 9-day high and 9-day low. Likewise, if are applying the Ichimoku Kin Hyo indicator on a weekly chart, the PH and PL notion would consider 9-week high and 9-week low, and so on. Interpretation For interpreting signals from the Ichimoku, the first thing which should be considered is the crossover between the conversion line and the base line along with relative position of Span A and Span B. When the conversion line crosses above the base line from below, it is typically considered as a positive signal, and when the conversion line crosses the base line below from above, it is considered as a negative signal. Furthermore, if the positive crossover between the conversion line and the base line takes place above Span A, it reflects on the strength of the trend towards upward. Likewise, if the negative crossover between the conversion line and the base line takes place below Span B, it reflects on the strength of the trend towards downward. Ideally, if Span A trades above Span B, the trend is considered to be an uptrend. Likewise, if Span A trades below Span B, the trend is considered to be a downtrend. The behaviour of the cloud as either support or resistance depends upon the relative position of the price with respect to the cloud. For example, if the price of an asset is trading below cloud, the cloud acts as the resistance zone for the price. Likewise, if the price of an asset is trading above cloud, the cloud acts as the support zone for the price.

What are GAFAM Stocks? GAFAM Stocks are perhaps the most famous and sought-after stocks of the last decade. The dominance of these companies during the 2010s in the stock market will be remembered in the books and adages.  It is the creation of market participants that develop acronyms like GAFAM, which include five large American companies having dominance across most jurisdictions. GAFAM stands for Google, Apple, Facebook, Amazon, and Microsoft.  Over time these companies have gained dominance in their primary business. In addition, GAFAM stocks have been aggressive in expansion and entering new verticals.  Although there have been considerable acquisitions along the way, the investments in research & development and innovation have been at the forefront of the capital expenditure plans.  Google Officially known as Alphabet Inc., ‘Google is not a conventional company’ is a statement made by its founders in their early letters. It has not been a conventional company, indeed. Google has developed significant networking within its products.  As a dominant search engine of the world, Alphabet reaps large revenue through advertisements through its flagship search engine and other products. Over the years, the company has been able to expand in other verticals such as mobile phone operating system – Android, web browser through Google Chrome.  Alphabet has two operating segments. Under Google, the company houses Search engine, YouTube, Search, Google Play, Google Maps, Android, Chrome, hardware, Google Cloud.  In other bets, the company includes businesses that are not material individually. These businesses include Calico, Verily, Waymo, CapitalG, GV, X and more. Almost all revenue of Alphabet is derived by Google segment.  In 2019, Alphabet recorded revenue of $162 billion, and around $161 billion was derived from Google segment. Operating income of the company was $34.2 billion, while net income of the company was $34.3 billion.  Read: Unboxing Revenue Growth Streak of Google and Microsoft Apple  Established in 1977, Apple Inc. is a consumer electronic company engaged in manufacturing of various consumer products. Apple mobile phones are renowned across the world, and it also makes personal computers, wearables, tablets, and accessories.  iPhone is the flagship mobile operates on an in-house developed iOS operating system. Mac is a brand for its personal computers that are also used extensively across the professional domain. iPad is a line of tablets, which run on iPadOS.  Apple also sells other wearables and accessories that include Apple Watch, Apple TV, Beats products, iPod Touch, Airpods. The core strength of the company has been its capability to innovate and launch products continuously.  iCloud is its cloud service, and data of its products can be stored in the cloud. As a consumer business, it markets are focused small individual customers that do not constitute a material portion of revenue individually.  In 2019, Apple recorded revenue of $260.2 billion. Its operating income for the period was $64 billion, while net income was $55.25 billion.  Facebook  Facebook Inc. was established as a social networking website and has grown tremendously due to its strong networking effects. It enables people to connect with each other or in groups. Facebook is used in mobile phones, personal computers, handsets etc. It has been a great place to share opinion, ideas, videos and photos. With its large user base, Facebook and its products are used for advertisements. The traditional modes of advertisements have lost significant market share to companies like Facebook.  Instagram is also a part of Facebook. It is used by people across the world to share photos and videos. It also offers a similar type of services like Facebook and has emerged as a networking platform for digital creators and influencers.  WhatsApp is a messaging mobile phone application. It allows people to connect privately and is extensively used by people. Messenger is another application by Facebook that enables people to connect with family, friends, groups and businesses.  Oculus is the hardware business of Facebook that helps to connect people through its virtual reality products. A major portion of revenue is generated by marketing and advertisement through its products that are used by large scale potential consumers.  Watch: Facebook launching 'Shops' on its social Media Platform | Market Update Amazon Amazon.com, Inc. was established as e-commerce in 1994. The company serves consumers, sellers, developers, enterprises, and content creators. Amazon also provides advertising services to publishers, sellers, vendors, publishers, and authors.  It serves consumers through its online and physical stores. Amazon offers a range of categories and is has a strong online retail presence. It has been engaged in manufacturing consumer electronics such as Kindle, Fire TV, Fire Echo, Alexa, Ring etc.  Amazon Prime is a membership of the company that provides shopping benefits, streaming of entertainment content, including movies, original content. It intends to provide customers with low prices and home delivery of goods.  It also enables sellers to access Amazon marketplace, which includes stores and online website. Amazon earns through a percentage of sales, fixed fee, combinations etc. Amazon Web Services offers cloud service to a range of public and private enterprises to store data.  Kindle allows content creators to publish and sell content/books on Kindle and earn a royalty on sales. In 2019, the company recorded net sales of $280.5 billion. Operating income for the year was $14.54 billion, and net income was $11.59 billion.  Microsoft  Microsoft Corporation is a technology company that develops software, services, devices and solutions. Its products are extensively used by businesses and individual customers to operate personal computers.  Microsoft’s platforms allow improving small-businesses productivity, educational outcomes, driving competitiveness of large businesses. As a platform and tools provider, the company empowers enterprise and organisations of all sizes.  Now it is emphasising on innovation for the next phase of computing stage. Other than its legacy operating system, Microsoft provides cloud-based solutions, services, software, platforms, content, server applications, desktop management tools, software development tools etc.  It also designs and manufactures and sell devices, including gaming consoles, PCs, tablets, entertainment consoles, and related accessories. In 2020, the company recorded revenue of $143 billion. Operating income for the year was $53 billion, and net income was $44.3 billion. 

What is XML (Extensible Markup Language)? XML (Extensible Markup Language) is a text-based markup language. It is derived from SGML or Standard Generalized Markup Language. XML tags, unlike HTML tags, detect the data and are used for storing and managing data.           What are the characteristics of XML? XML is extensible. It means that there is a possibility that you can build your self-descriptive tags/languages that fits your application. XML allows the user to store data irrespective of the way it is presented. This is one of the advantages XML has over HTML. World Wide Web Consortium developed XML and is available as an open standard. XML is used to store & transport data. XML tags are self-descriptive. The markup language is used to carry data. In HTML, we display data in a presentable way. Through XML, we can carry this data from one application to another. XML tags are self-defined. The language is platform and language independent. It means that whatever application you use like Java or through an oracle, there would be no impact on the XML page. Facilitates easy communication between two platforms. What are the Advantages of XML? Separate data from HTML (HyperText Markup Language) Simplifies data sharing Increases data availability XML simplifies platform change. For example, if you have a data on SQL server and want to import to oracle server, then it can be made possible through XML. An Example to explain XML A simple code to represent the above hierarchical structure in XML: //*{mandatory line to start xml and is called declaration}//* <?xml version= ”1.0” encoding = “ ISO-8859-1” ?>   <college> <class 1> <name> ABC</name> <roll> 01 </roll> </class 1> <class 2> <name> DEF </name> <roll> 02 </roll> </college> In this code, we have created our own tags like <college> <class> <name> and <roll>.  As highlighted in the diagram as well, there is a root element, and while writing an XML code, it is mandatory to have a root element. It should be noted that the tags used in the code are case sensitive. Hence, the opening and closing tags should be in the same case (upper or lower). Also, XML is dynamic in nature. How to Import an XML file into Excel? One can import XML files in an Excel workbook to make them more readable for humans. The BI tool, Power Query makes it easy to import an XML file and transform it as per the user’s requirements. Suppose you save the XML file mentioned above on your system as student.xml. To import the file, follow the steps mentioned below: Open excel and go to Data tab in the ribbon Click get data Select from the file Select From XML A window will open. Go to the folder where the file is saved and then click the button “Import”. In the next step, you would see that a navigator window open, and we can see a preview of data from the XML file in a table format. What is an XML map? XML maps are ways by which MS Excel (Excel) represents XML schemas within a workbook.  Excel uses maps using binding data from the XML file to cells and ranges on the worksheet. Through XML maps it is possible to export data from excel to XML. If there exists an XML map on the worksheet, the user can import data into map ant time. XML schemas describe the elements used in the XML document and can be used by the programmers to verify each item in the document. It defines an element, attributes, and data types. Through XML map, XML schema gets copied to the workbook to create map instead of referencing the schema as an external file. Using XML Maps, you can add and delete maps. Once the XML file and schema are imported in the Excel file, the user can add further details and make desired changes. The edited file can again be exported to XML. Where we develop XML code? To create and modify XML code quickly and effortlessly, we can use Microsoft XML Notepad. With this tool, the structure of the XML data is shown graphically in a tree structure. The interface presents two panes: One for the structure. One for the values. The user can add comments, attributes, elements, attributes, and text to the XML document by creating the tree structure in the left pane and entering values in corresponding text boxes. Applications that support XML import and export: RDBMS tools including IBM DB2 (pureXML), Microsoft SQL Server, Oracle Database and PostgreSQL. Machine learning tools such as R Studio, and Python.

What is a tariff? A tariff is a tax levied on foreign goods and services imported into a country. Tariffs make goods and services more expensive and thus, consumers shift to the domestic alternatives. Tariffs are usually imposed as an economic tool to improve the balance of trade as they decrease the imports. They are also targeted at protecting the domestic producers from competitive foreign goods. Tariffs can also be imposed on exports of goods and services, although that is seldom the case. It is done to discourage exports of certain goods and services. Tariffs are also used as a political tool. Governments may sometimes favour certain countries with whom they have political ties, while they may try to limit trade with other countries owing to technological, economic and political spats. How are tariffs levied? Tariffs have three broad types based on how they are levied: Ad-Valorem Tariff: Ad valorem taxes are the taxes that are levied as a fraction of the value of goods and services. They are represented as a percentage of the total value of imports and are proportionate to the value of imports. Specific Tariff: Specific tariffs are levied per unit of quantity. Specific duties are flat fees applied over a specific quantity of goods and services. For instance, a tariff of $10 levied per 20 kgs of wheat is an example of a specific tax. This tax is proportionate to the quantity of the imported good. Compound Tarifs: Compound tariffs are a mix of both specific tariff and ad valorem taxes. For instance, a tariff that has a specific tax up to a certain amount followed by an ad valorem tax afterwards is an example of a compound tariff. What impacts can a tariff have? Import tariffs can be beneficial to an economy in many ways. As imports become expensive, consumers shift towards domestic goods. This competitive advantage enjoyed by domestic goods translates into increased production along with higher profits to domestic firms. Thus, as firms start gaining increased profits, they expand and hire more workers. This increases the overall employment in the economy. Therefore, tariffs affect two major areas positively: the domestic competitiveness of firms as well as the employment rate in the economy. Tariffs can sometimes also be implemented to protect the domestic economy from infiltration of foreign produce. Sometimes, highly developed nations impose import duties to safeguard their economies from dumping of foreign goods. This kind of tariff is called an anti-dumping duty which is used when a country is suspected of exporting a good at a rate which is lower than the rate at which the same good is sold in their domestic markets. How does a tariff work? Consider the following diagram: In the figure above, point O represents the situation of autarky or a closed economy that has no trade with foreign countries. Now consider the effects of the economy opening its borders to international trade. The international price of the same good is Pw, which is significantly lower than Pd, the domestic price. Under the assumptions of free trade and a small domestic economy, the domestic prices would also become equal to Pw. At price Pw, the domestic demand is Q4 while the domestic supply is Q1. The difference between the two is met by the quantity of imports. The lower price of the imports would make them preferable to the domestic produce. However, when a specific tariff is introduced on the imports, the price of the imported good rises to Pw + T. This makes the good more expensive and thus reduces its imports into the economy from Q1Q4 to Q2Q3. Who are the winners and losers when a tariff is implemented? The welfare implications of a tariff are a subject of popular debate. Many theorists argue that tariffs bring distortions into the economy. The red box ABCD represents the revenue earned by the government through the tariff. The line AD represents the value of tax while the link DC represents the amount of imports. The domestic prices would rise to Pw +T when the tariff is introduced. As a result, domestic consumption falls to Q3, while the domestic produce increases to Q2. Therefore, domestic producers gain from a tariff. The supply has increased from Point E to point A. The demand has come down from point F to point B. The government also gains a lumpsum amount equal to AD multiplied with DC, which is the tariff revenue. Thus, both producers and the government are gaining from a tariff. However, the entire process is giving rise to a deadweight loss which is represented through triangles AED and BCF, both coloured in blue. These two triangles are not utilised anywhere and are lost in the process of tariff implementation. Thus, there is a welfare loss associated with tariffs, that is paid by the consumers. The consumers could afford a greater amount of the good at price Pw. However, when prices are increased to PW + T, part of welfare lost by consumers goes to producers, and a part of it goes to the government. But triangles AED and BCF are lost in this process. Therefore, tariffs cause a distortion in a free market and can even lead to many adverse economic repercussions. Thus, for a small economy, tariffs need to be implemented with proper regulation and without any intent of harming any country’s producers. Rather, the intent should be to protect the domestic producers. The same might not be true for a large economy as any protectionist intent by one country can trigger a trade war between several countries as seen in a few past scenarios.

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