The volatility contraction pattern (VCP) is a trading pattern identified by Mark Minervini, a renowned stock trader and author of “Think and Trade like a Champion” and “Trade like a Stock Market Wizard”. Mark achieved a staggering 34,000% return in 5 years using this pattern alone.

In this blog, we will uncover the secret behind the VCP pattern so that you can start applying it to your trading strategy.

What is VCP?

The Volatility Contraction Pattern (VCP) is a “buy high, sell higher” trading strategy that helps traders identify stocks with high buying momentum.

Simply put, VCP involves finding stocks that were in a strong uptrend and then went through a consolidation period. If the stock shows no signs of breaking down and there is a contraction in price and volume, traders can expect a breakout after the last retracement.

This breakout can be long-lasting and powerful, making it highly profitable for traders who can spot this pattern. Compared to other market patterns, VCP carries small and controllable risks, making it one of the most popular trading patterns for traders.

Spotting VCP in 4 Simple Steps:

Step 1: High Demand — Building Momentum

The foundation of VCP lies in identifying a strong uptrend and recognizing the build-up of momentum. To find stocks with a high demand, look for a strong uptrend price movement. Although it may sound counterintuitive, the best VCP patterns occur after big strong moves.

Step 2: Contraction from Left to Right — Selling Pressure

After the strong uptrend, the asset will experience an increased selling pressure, as some traders decide to take profits at that point, leading into a period of consolidation. The compression created between buyers and sellers makes the stock go through a few retracements. If it is observed that the trading range is getting smaller in each of the new retracements, it shows the stock has a great foundation of uptrend momentum, which is a bullish signal.

Step 3: Decreasing Volatility — Reduced Selling Pressure

Moving on to the next stage, traders could observe that the price and volume are getting tighter, and the lows are also getting higher. This tightening indicates a decrease in selling pressure, and the stock price should hold a support level like VWAP or commonly used moving averages. Traders should closely monitor this period as it signifies a potential shift in market sentiment and a possible entry opportunity.

Step 4: Breakout — Capitalizing on Increased Demand

The final step in the VCP is the breakout. Traders should be prepared to enter the market at this point when demand significantly exceeds supply. This breakout is often accompanied by a substantial bullish bar, indicating a strong upward movement. Timing is crucial during this phase, and traders need to be vigilant to capitalize on potential gains.

Wrap up

The Volatility Contraction Pattern (VCP) has proven to be a highly effective trading strategy. Simply by following the 4 steps covered in this blog, you can also practice to achieve the same stunning return by Mark Minervini. Remember, success in trading requires continuous learning, adaptability, and disciplined execution. Start exploring the VCP today and take your trading to new heights.

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Disclaimer: The information provided in this article is for educational purposes only and should not be considered as financial advice. Trading involves risk, and it is important to conduct thorough research and seek professional guidance before making any investment decisions.

Originally Published on Medium