Breakouts · Advanced
Volatility Contraction Pattern (VCP)
In a leading uptrend, each pullback gets smaller and volume dries up. Buy the breakout from the tightest point, the pivot.
Mark Minervini, who won the US Investing Championship in 1997, popularised the Volatility Contraction Pattern in "Trade Like a Stock Market Wizard". It describes how supply is gradually absorbed in a strong stock before a major advance.
Why it works
A base with contracting pullbacks (for example 25%, then 15%, then 8%, then 4%) shows that sellers are disappearing: each dip is bought sooner. Lower volume during the final contraction confirms it.
The final tight area gives a small, precise risk, and the breakout from it often starts the next leg up.
The rules
Setup
- Trend template: price above the 50, 150 and 200-day averages, with the 50 above the 150 and the 150 above the 200; the 200-day average rising for at least a month; price within about 25% of its 52-week high.
- Two to six contractions, each pullback smaller than the previous one, with volume declining.
Entry
- Buy as price breaks above the pivot (the high of the last, tightest contraction), ideally with volume well above average.
Stop loss
- Below the low of the last contraction. Minervini recommends keeping losses small, typically well under 10%.
Exit and management
- Sell into strength after a large advance, or trail the stop under the 20 or 50-day average.
- Exit quickly if the breakout fails back into the base.
Filters that improve it
- Favour markets leading their index (strong relative strength) and a healthy overall market.
Worked example
Illustrative example: a stock in a strong uptrend corrects 22%, recovers, corrects 12%, then 6% and finally 3% between $96 and $99 on falling volume. The pivot is $99. A buy stop at $99.20 triggers on volume twice the average; the stop is at $95.80 (about 3.4% risk).
Illustrative numbers, not a recommendation.
Common mistakes
- Calling any base a VCP without real contraction.
- Buying far above the pivot, which turns a 4% risk into 10%.
- Ignoring the trend template and buying laggards.
How to practise it
On Candlemind's US stocks and indices, use 4H candles to find successive smaller pullbacks. Mark the pivot with a horizontal line and use a pending buy stop just above it.
Pre-trade checklist
- Stage 2 uptrend (trend template)
- Each pullback smaller than the last
- Volume drying up in the last contraction
- Buy stop at the pivot
- Stop below the last contraction low
Frequently asked questions
How many contractions does a VCP need?
Usually two to six. What matters is that each one is smaller and that volume contracts.
Is VCP only for stocks?
It was developed for stocks, but the idea of contracting volatility before a breakout applies to any liquid market.