Setting a Darvas boxes is relatively simple, but requires some patience and discipline.
All a trader has to do is watch the price of the stock.
In the rest of this article, when a high or a low is mentioned, it is a high or low price that is being discussed.
Depending on the method they are following, a trader will watch a stock for a new high during a given period, generally either six months or a year.
That new high will be used to set the top boundary of the Darvas box.
To confirm the top of the box, the trader then has to record three highs that are lower than the initial high that was used to set the top of the box.
If there is a price equal to or higher than the initial price used to set the top of the box, then the trader simply starts over.
After the top of the box has been set, look for a new low.
As in the top of the box, this low will followed by three higher lows.
Again, if there is a lower or an equal low price, the calculation needs to be restarted, with the trader looking for three higher lows to follow the low that threw off the calculation.
Darvas' method selected the limits of the support and resistance as set by the market.
These highs and lows are actually the upper and lower range of the stock's volatility.
When a stock reaches a high, it is reaching the upper limits of what the stock market will support.
The three lower highs that follow that price simply confirm the upper range.
The first high is a sign of the stock's strength, and the three following lower highs verify that the range is actually there.
Similarly, the low price, followed by the three higher lows confirms the bottom range of the stock's volatility.
Anytime a stock breaks out of the Darvas box, it is a sign to take some kind of trading action.
When a stock breaks out of its volatility range, it means that the stock is about to move.
If it breaks out while rising, this is a sign to buy into the stock.
After you've bought into the stock, you need to immediately take the next, single most important step in the Darvas box method.
You need to set a stop-loss order.
A stop-loss order is an order placed with a broker that tells them to sell the stock at specific price.
The price that you should use for the order is the price that forms the bottom of the first Darvas box.
This way the stop-loss order will be triggered if there is any price action on the stock, at any time, that is below the bottom of the Darvas box.
Because when a stock breaks out of the Darvas boxes while falling, it is a sign to exit the position.