When to Buy and Sell and The Box Theory

Investing should be fun and profitable.

One of the ways to make investing fun is to make sure it is profitable.

Sounds simple doesn’t it but many have learned this can be difficult and or it can be difficult to “beat the market” during a calendar year

There are many sources for investing ideas that will help you determine what stock to buy and a few that will give you guidance on when to sell these.

Box Theory

One method that works well for me is a simple tool ( Box Theory) for predetermining when to sell the stock based on its performance.

Nicolas Darvas's stock selection method was called "BOX theory." He considered a stock price wave as a series of boxes. When the stock price was confined in a box, he waited. He bought when the price rose out of the box. He simultaneously set a stop-loss just under this trade price.

This is where I got the idea, but my Box Theory is similar to the advice given routinely in Investors Business Daily

The philosophy used is to monitor the performance of the stocks daily and sell them when they grow and reach a predetermined goal or fall to a certain percentage of loss.

When I buy a stock for trading (not for long term holding such as a dividend stock) I place the stock in a price box and sell it when the price goes out of the box. The upper bound for the box is a price greater than a 15% increase, the lower bound is a price lower than an 8% loss

I put these stocks in a watch list that shows the cumulative gain or loss and scan them daily to see if they have moved out of their box.

Sometimes I use different numbers for the box size depending on volatility and if the stocks leaves the box on the top side I can consider it for a new box, with new boundaries. More on this in Losses and Gains below.


Losses can be difficult to accept, but losses do occur for even the most successful investors. Prevention of unacceptable losses can be a key factor to making a profit. No one really knows for certain which way a stock will go in the future. Some can claim to be able to make this prediction....when they do beware.

  1. The first step is to determine what is the absolute worst loss that can be accepted. For general stock picks this has been suggested by Investor Business Daily and others to be around 8%. For more volatile picks a little more wiggle room may be needed, perhaps as much as 15%. A chart review of a stocks past performance may provide some idea as to what can be expected in the future. Even this can be misleading, but it is a start. Using the somewhat conservative approach of limiting the loss to 8% has generally worked well for me. Be prepared that following this guidance will at some point lead you to make a sale at an 8% percent loss only to see the stock bounce back and recover. When this happens remind yourself that insurance to prevent the larger losses are necessary but not free.

  1. After the percentage is established, I get the best results when I stick-to-the-plan. If the stock closes below the predetermined sell point, the next step is to sell the stock. Rather than using stop losses, one can establish a rule such as selling at the next days opening or perhaps at a convenient pre-determined time during the day, but stick-to-the-plan.

  1. After the sale has occurred it is usually best to move on and not be too concerned about what happens to this stock after it is sold. If this is troublesome it may be best to put this into a file for later review. 


Gains are certainly the objective and many stocks can offer this reward.

  1. The first step is once again to establish what the goal is. A good general goal has been suggested to be 15%. The time to reach this goal cannot be pre-determined. An aggressive selection can reach this goal quickly, but it can also reach the maximum loss first. It may be helpful to once again consider a chart to see what has happened in the past, however once again this is the simply the past and an not an indicator of the future, but it may give clues as to the volatility.

  1. After the percentage is established, I deal with the gains a little differently. If the stock reaches the predetermined goal, the next step would be to sell the next day. However if a review indicates that the potential is still present that was seen when the stock was first purchased, I simply reset the sell point from this new price, just as if the stock were a new purchase and begin the process again. If a good  selection is made, perhaps resetting of sale prices as the stock goes up will occur a few times.


For now this explains the philosophy I often use and that is to set pre-determined sell prices when you buy a stock, both for losses and gains. This makes the subsequent selling less emotional and painful. The stock itself determines when the time is to sell. You simply execute a predetermined plan.