The Volatility Contraction Pattern

Mark Minervini is a well-known stock trader and author who has developed a number of strategies for identifying potential winning trades in the stock market. One of his strategies is known as the "Volatility Contraction Pattern," or VCP for short.

The VCP is a technical analysis pattern that identifies stocks that have undergone a period of high volatility, followed by a period of lower volatility as the stock price consolidates. According to Minervini, this pattern can be a strong indicator of an impending price breakout and can help traders identify potential buying opportunities.

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Chart 1 - An Example of Volatility Contraction Pattern in 2 Different Stages (Vis Dynamics as of 17th Feb 2023) - chart created using Trading View 

To identify the VCP, Minervini looks for stocks that have experienced a sharp price rise followed by a period of price consolidation. During the consolidation period, the stock's price range narrows and trading volume typically declines. This indicates that the stock is in a period of lower volatility, which is often followed by a strong price move in one direction or the other.

Minervini emphasizes the importance of paying attention to the stock's overall price trend and momentum when looking for VCP patterns. He advises traders to look for stocks that have strong uptrends and are in a position to continue rising after the period of consolidation ends.

source: twitter acct @GrowthofWealth

figure 1: Variation of VCP pattern

While the VCP is not a foolproof trading strategy, it has been successful for Minervini and many of his followers. However, as with any trading strategy, it is important to do your own research and analysis to determine whether a particular stock is a good fit for your portfolio.

Drawing from my personal experience, it's clear that combining VCP analysis with a thorough examination of the fundamentals will increase your chances of achieving success in trading / investing. While this has been mentioned before, it's worth reiterating that the overall market conditions also play a crucial role in determining success. It may seem like an obvious point, but it's worth emphasizing how important it is to pay attention to the broader market trends and factors when making trading decisions. By keeping these factors in mind, you can increase your odds of success and achieve your trading goals.

In conclusion, the Volatility Contraction Pattern (VCP) is a technical analysis pattern developed by Mark Minervini that can help traders identify potential buying opportunities in stocks that have undergone a period of high volatility followed by a period of lower volatility and consolidation. However, it is important to exercise caution and do your own analysis to determine whether a particular stock is a good fit for your portfolio.

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footnote: 

The Ascending Triangle Chart Pattern

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Chart 2: Food Empire Chart from Aug 2020 to Apr 2021 making a recovery post Covid19 correction in Mar 2020 period

Upon examining VCP, it is difficult not to draw a comparison to the Ascending Triangle Chart pattern. These two patterns share similarities, such as the reduction of volatilities towards the end of their formation, just prior to a breakout.

Ascending Triangle chart pattern is a bullish continuation pattern that typically forms during an uptrend. In this pattern, the stock's price will reach a resistance level multiple times, but each time it will fail to break through. Meanwhile, the stock's lows will be gradually rising, forming a trendline. These trendlines and resistance levels form a triangle shape on a chart, with the resistance level forming the horizontal line and the trendline forming the diagonal line. Once the stock finally breaks through the resistance level, it is expected to continue its upward trend.