An expert shows how it is done

During early May 1959, Darvas made four new initial buys into other leading stocks he had been watching. He took positions in Zenith Radio, Beckman Instruments, Fairchild Camera and Litton Industries. Once he established his positions, he set stop-loss orders on each one of them at 10% below each one’s purchase price. On May 18, he was stopped out of Beckman Instruments, as it pulled back in price and triggered a 10% loss for him. The very next day, Litton Industies fell to $106 1/4 per share from Darvas’ buy point of $112. Even though it had not yet reached his stop-loss order yet, Darvas sold out and took a 5% loss, as he did not think it was acting correctly. This is another great skill that comes to the best over time — their ability to trust their judgement when things do not seem right and they then cut their losses even smaller than their original strategies allowed. Then Darvas, after those two positions has been closed, took that capital and moved it into his other two holdings, which were acting well and displaying strength. He followed up with his initial purchase of 500 shares in Fairchild Camera with a pyramid buy of 4,000 more shares ranging in price from $123 1/4 to $127 per share. He then made a follow-up buy to his initial position in Zenith Radio with a 5,000 share purchase, ranging in price from $99 3/4 to $107 1/2. These two stocks end up contributing to the millions he made during the strong 1958 and early 1959 market. This is classic stock trading skill at its finest that is never taught in any textbook or classroom. Darvas, with just those four transactions, can teach one plenty about the stock market. He stayed in tune with a strong market and bought into four leading and funamentally strong companies that were initially moving up in price. He then took small positions initially to test his investments. He set strict loss-cutting strategies in place to control his emotions and limit his risk. He took his first loss in stride and then cut his second loss even smaller, without getting angry or hoping for comebacks. He also experienced the average 50% win/loss ratio that even the best traders throughout history have experienced. The difference is that the best traders keep the losses small abd let the winners ride. Darvas then took available capital and piled it into his other two stocks that were moving up in price. Pyramiding winning stocks is what leads to big profits. He then held those two stocks until they showed selling signals or forced him to sell them. That is how legendary stock traders make millions.
 
Adapted from "How legendary traders make millions" chapter 6.
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