VCP Pattern (Volatility Contraction)
— Signal Just Before Explosion
VCP (Volatility Contraction Pattern) is a pattern where volatility gradually contracts before a stock price surge. This article explains the conditions, entry timing, and stop-loss criteria of this pattern established by Mark Minervini.
What is VCP?
VCP (Volatility Contraction Pattern) is a pattern established by American champion trader Mark Minervini. It is characterized by the stock price lowering its highs and raising its lows over a certain period, with the amplitude gradually narrowing. Often, a surge occurs after the final contraction and breakout at the pivot point.
3 Key Conditions of VCP
- Number of Contractions: Usually 3-6 times. The range of each contraction (high to low) must be smaller than the previous one.
- Decrease in Trading Volume: Trading volume must gradually decrease during the contraction process (signal of selling pressure exhaustion).
- Surge in Volume at Breakout: At least 1.5 times the average when breaking the last contraction high.
Examples of Contraction Depth
Ideal VCP contraction example:
- 1st Contraction: −25% (base formation)
- 2nd Contraction: −15%
- 3rd Contraction: −8%
- Final Contraction: −4-5% (most ideal)
As the contraction range becomes smaller, it signals that selling pressure is being exhausted.
Pivot Point and Entry
The high of the last contraction + 0.1-0.5% is the pivot point. Enter when this price is exceeded with a surge in volume. Minervini's basic principle is to cut losses if the stock price drops 8-10% after breaking the pivot.
Relationship Between VCP and Bollinger Squeeze
DawnScan's Bollinger Band Squeeze signal aligns with the volatility contraction phase of VCP. Stocks that show a combination of squeeze + OBV accumulation + decrease in volume often meet the VCP conditions.