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    Volatility Contraction Pattern (VCP)

    Uploaded by

    Steve Hatol
    The document discusses volatility contraction patterns (VCPs) such as flats and zigzags that occur after strong moves up in stocks. These VCP consolidations involve contracting volatility and volume and act as last chances to enter the trade before another continuation rally. Traders wait for these well-behaved VCP patterns to develop rather than anticipate moves. The larger preceding base provides context that the consolidation will result in a further increase, while the VCP itself signals the final opportunity to enter the trade. Both tight and wide VCP patterns can lead to breakouts if volatility decreases and higher lows are made as sellers are absorbed.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Volatility Contraction Pattern (VCP)

    Uploaded by

    Steve Hatol
    372 views5 pages
    The document discusses volatility contraction patterns (VCPs) such as flats and zigzags that occur after strong moves up in stocks. These VCP consolidations involve contracting volatility and volume and act as last chances to enter the trade before another continuation rally. Traders wait for these well-behaved VCP patterns to develop rather than anticipate moves. The larger preceding base provides context that the consolidation will result in a further increase, while the VCP itself signals the final opportunity to enter the trade. Both tight and wide VCP patterns can lead to breakouts if volatility decreases and higher lows are made as sellers are absorbed.

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    Minervini

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    The document discusses volatility contraction patterns (VCPs) such as flats and zigzags that occur after strong moves up in stocks. These VCP consolidations involve contracting volatility and volume and act as last chances to enter the trade before another continuation rally. Traders wait for these well-behaved VCP patterns to develop rather than anticipate moves. The larger preceding base provides context that the consolidation will result in a further increase, while the VCP itself signals the final opportunity to enter the trade. Both tight and wide VCP patterns can lead to breakouts if volatility decreases and higher lows are made as sellers are absorbed.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    372 views5 pages

    Volatility Contraction Pattern (VCP)

    Uploaded by

    Steve Hatol
    The document discusses volatility contraction patterns (VCPs) such as flats and zigzags that occur after strong moves up in stocks. These VCP consolidations involve contracting volatility and volume and act as last chances to enter the trade before another continuation rally. Traders wait for these well-behaved VCP patterns to develop rather than anticipate moves. The larger preceding base provides context that the consolidation will result in a further increase, while the VCP itself signals the final opportunity to enter the trade. Both tight and wide VCP patterns can lead to breakouts if volatility decreases and higher lows are made as sellers are absorbed.

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    VOLATILITY CONTRACTION PATTERNS

    • Flats
    • Zigzags

    Minervini is generally a trend follower / momentum trader. He trades longs. Rarely shorts. Focuses on relative strength
    leaders. And the way he buys into strong issues is he waits for them to establish bases after strong up-moves.

    Bases are just consolidations or sideways action within the context of an uptrend. There are generally two types of
    consolidation or volatility contraction patterns: FLATS and ZIGZAGS. And they occur near high with volatility and volume
    contracting during VCP consolidations.

    VCP trading is all about WAITING for the RIGHT HAND SIDE of the chart to DEVELOP.

    You do not anticipate unless key elements such as signals and triggers are already apparent.

    There are two other elements of VCP trading:

    • First one is that there is a bigger base and context already in place.
    • Second one is what we just talked about, which is the flat or zigzag consolidation prior to a continuation run.

    The BIGGER BASE provides CONTEXT that any type of consolidation after the move from the base will result in a
    continuation rally. The FLAT or ZIGZAG on the other hand is the LAST CALL for anyone who missed out the breakout from
    the base.

    BOH Society. Lecture by Jiego Mojica on Ryver (2020 Jan 11 1209).


    BOH Society. Lecture by Jiego Mojica on Ryver (2020 Jan 11 1209).
    This brings me to my next point: People like Minervini who trade VCPs are known to scan for stocks trading near 52-
    week highs. I don’t do this personally, but you can use screeners on TradingView that scan specifically for this condition.
    Then they just do it over and over again and use this as their CLASS A SETUPS.

    Your trading experience will improve dramatically if you focus on stocks that are well-behaved after a strong trend or
    immediately coming out of a base structure. That is the essence of VCP, well-behaved consolidation that allows traders
    to safely board a trade with minimal whipsaws.

    The other thing you need to understand about FLATS and ZIGZAGS is that not all of them will be tight. Not all FLATS and
    ZIGZAGS will have small ranges. Some will be big but will still share the same elements of volatility contractions that can
    lead to massive breakouts. The important part of these consolidations is that the volatility needs to go down as price
    works out the profit taking activity. Remember, the other way to think about consolidation is that these are profit taking
    activities.

    Wide consolidations will almost always mean longer profit taking because unlike the tight consolidation where everyone
    will need to wait for a resumption of trend to profit from the trade, wide ranges can at times encourage traders to just
    swing trade during the consolidation phase. But at some point, all sellers will be absorbed, and price will be able to
    breakout from the range. The key here is that range must tighten, become narrow, and higher lows be put in place to
    successfully breakout from a wide range. As what Acampora would say, “the bigger the base, the higher in space.” and
    that’s what we’re trading for when it comes to wide flats / wide zigzag / wide range consolidation.

    BOH Society. Lecture by Jiego Mojica on Ryver (2020 Jan 11 1209).


    Here’s an example of how a wide range takes a longer time to absorb sellers. But it’s still a candidate for a breakout
    because the range is well-defined with an original base providing context. We’ll track this in the coming weeks and see if
    it breaks out and then forms a VCP.

    BASE + WIDE FLAT CONSO and volatility contraction leads to resumption of trend.

    BOH Society. Lecture by Jiego Mojica on Ryver (2020 Jan 11 1209).


    BITCOIN can be a tight flag consolidation, so track intraday chart to see the pattern transition.

    BOH Society. Lecture by Jiego Mojica on Ryver (2020 Jan 11 1209).

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