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VCP

Understanding the Volume Contraction Pattern (VCP)The VCP is an essential pattern for swing traders, as it signals the potential for a significant price move. The pattern occurs when a stock goes through a series of contractions in price and volume, indicating that selling pressure is waning and the stock is setting up for a potential breakout. Key Components of VCP: Trapped Buyers (TBs): These are investors who bought at the peak and are now "trapped" in a position as the stock price declines. They are likely to sell when the price gets back near their purchase price, creating resistance. Loss Cutting (LC): As the stock declines, some investors will cut their losses and sell their positions, adding to the downward pressure. Profit Taking (PT): Once the stock rebounds, those who have profits from buying at lower prices may start to take profits, which can lead to a temporary reversal or pullback in price. Bottom Fishers (BFs): These are investors who are looking to buy the stock at what they perceive to be a bargain price, often near the lows of the pullbacks. Stages of VCP: Initial Decline (1): The stock experiences a significant drop in price, often on high volume, indicating strong selling pressure. First Contraction (2): The price begins to stabilize and contract. Volume diminishes here, suggesting that selling pressure is decreasing. Advance (3): The stock price rises, potentially leading to TBs selling near their break-even points. This can create resistance, but if the stock can move past this level, it's a positive sign. Second Contraction (4): A higher low is formed compared to the initial low. Volume contracts further, indicating selling pressure continues to wane. Subsequent Advance and Contractions (5): The pattern repeats, with each pullback being shallower and on lower volume, showing that supply is being absorbed and demand is taking over. Breakout (6): Finally, the stock breaks out from the VCP on increased volume, signaling that demand has overwhelmed the remaining supply. Trading the VCP: When trading the VCP, look for the following: A series of at least two contractions in price range and volume. Each contraction should be shallower than the last, showing less and less selling pressure. The breakout should occur on higher volume, confirming the pattern. Entry Point: A trader might enter a position as the stock breaks out from the final contraction. Stop Loss: A stop loss can be placed under the most recent low of the last contraction to limit risk. Profit Target: Targets can be set based on previous resistance levels or a multiple of the risk (stop loss size). Remember, while the VCP is a strong pattern, it's not foolproof. Always use proper risk management and consider the overall market conditions before taking a trade.
NASDAQ:COINEducation
by JS_TechTrading
1
Volatility Contraction PatternJS-Masterclass #4: The Volatility Contraction Pattern The Volatility Contraction Pattern (VCP) is a vital concept for successful traders and a key element in our JS-TechTrading strategy. In this tutorial, we will cover the following: 1. Why is it important? 2. The ‘Overhead Supply’ Concept 3. How to identify a VCP? 4. The Perfect Entry Point 1. Why is it important? The Volatility Contraction Pattern (VCP) allows us to find stocks which are getting ready to form a very specific low risk entry point at which the potential reward of our trades outweigh the risk. The main role that VCP plays is establishing a precise entry point at the line of least resistance. If a stock is under accumulation (large institutions putting their money into the stock), a price consolidation represents a period when strong investors ultimately absorb weak traders. Once the “weak hands” have been eliminated, the lack of ‘overhead supply’ (explanation see below) allows the stock to quickly move higher because even a small amount of demand will overwhelm the negligible inventory. This is referred to as the line of least resistance. Tightness in price from absolute highs to lows and tight closes with little change in price from one day to the next and also from one week to the next can generally found in constructive Volatility Contraction Patterns. These tight areas should be accompanied by a significant decrease in trading volume. 2. The ‘Overhead Supply’ Concept Any price action in the stock market is the simple result of supply and demand, just like in any other business. If demand is bigger than the supply, the price goes up. If supply outweighs demand, prices are falling, it is as simple as that! What happens to supply and demand in a Volatility Contraction Pattern? Point 1: Traders buying at point 1 in the graphic are called ‘Trapped Buyers (TBs)’. Point 2: the price has fallen and many people think the stock is ‘cheap’ at this price and buy the stock – the so called ‘Bottom Fishers (BFs)’ provide the relevant demand needed to trigger a price increase. Point 3: the price has come back up to the level at point 1. Now two things happen a) The Trapped Buyers who bought a price level 1 are very happy to get out of the trade at breakeven after having had paper losses at point 2. The cut their losses (LC) and provide the relevant supply to the market needed to trigger a declining price. b) The Bottom Fishers take nice quick profits and sell their stocks, providing additional supply to the market which adds to the decline in price. Points 4, 5, 6: The same concept applies here but as time goes by, the volatility contracts from left to right as fewer and fewer traders provide their demand and supply to the market, the price action dries out like a towel: 3. How to identify a VCP? A common characteristic of virtually all constructive price structures (those under accumulation) is a contraction of volatility, from greater volatility on the left side of the price base to lesser volatility on the right side in the chart. This pattern needs to be accompanied by specific areas in the base structure where volume contracts significantly: Let’s look at an example: In this example, we are seeing a total of 5 contractions from left to right, starting from 1 (ca. 25% decline) to 5 (< 5% decline) under significantly reduced trading volume. This is exactly what we want to see. At the final base 5, supply has stopped coming to market which is the reason for the low trading volume in this time-period. Due to the lack of supply, only very few demand is needed to push the price significantly higher. We therefore have a high probability of an explosive price increase. Also, we can set our SL just below the final base at 5 which means that our max. risk for this trade is < 5% - our potential reward significantly outweighs our risk. 4. The Perfect Entry Point When the price breaks out of the right side of the final base under higher volume, we have a perfect entry point. As the supply has stopped coming to market, only little demand is needed to cause an explosive price move upwards. Furthermore, the volatility contraction results in a tight base at the right end of the pattern resulting in a low risk entry point – the Stop-Loss can be set under the low of the latest base structure on the right side of the pattern which is normally in the range of about 5% risk. This is a vital concept for successfully timing the continuation of an existing trend.
Education
by JS_TechTrading
2
Anatomy of a Breakout TradeThis is the anatomy of a breakout trade. First, you want to see a large advance in the stock. At a minimum, price should be at least 30% above its 52-week low. Stock will often be up several hundred percent before forming this pattern. Next, you want to see a series of pullbacks - each with a shallower depth than the last. Mark Minervini refers to this as a volatility compression pattern or "VCP". This pattern is a visual representation of the supply/demand dynamic playing out. There is supply, i.e. sellers, near the $33 level. Each time the stock reaches that level, selling pressure sends the stock lower. However, as those sell orders are worked through, each pullback should be shallower than the last - a sign that there are now fewer sellers. The stock is being transferred from weak hands to strong handed buyers. Ideally, you want to see the final pullback in the single-digit range. Look for signs of institutional accumulation during this pattern. These are large green volume candles showing heavy buying by large funds. I also like to see volume dry up in the final days leading up to the breakout. This is further confirmation that sellers are gone and the stock is becoming harder to buy. With little supply, any increase in demand, i.e. buying, will easily propel the stock higher. Finally, you want to buy the moment the stock clears resistance. If there is not a clear resistance level like on this chart of CCB, use the high of the most recent pullback as your breakout point. This is where you want to buy. Place a stop beneath the last swing low (the low of the last pullback). If done properly, you should never need to risk more than 10%. Although not necessary for a successful trade, high volume on the day of the breakout and during additional up days soon after the breakout will greatly increase the odds of a profitable trade.
NASDAQ:CCBEducation
by rossgivens
6
CAREPLS Up Trend Stock + VCP PatternObserved Carepls have similar pattern to my previous trade at Rubberex (Up trend + VCP pattern). Up trend confirmation: 1) Stock price above MA50 trend line. 2) MA50 trend line above MA200 trend line. VCP 1) Observed 3 contraction where the contraction % getting lesser. (1st contraction ~64%, 2nd contraction ~12% and 3rd contraction ~8%) 2) VCP very much related to supply/demand. 3) Each contraction getting lower mean people more willing to hold their ticket rather to sell it. (Volume shown getting lower as well) I enter Carepls on 22 April 2020 when the price break 0.350. I predict it will break the neckline on RM0.405. And the movement of the price proof that my analysis is correct. I still holding Carepls as the momentum still there.
MYX:CAREPLSEducation
by adamkhoosk
14
Rubberex Up Trend Stock + VCP TradeCurrently I no longer holding any Rubberex. Just intent to record down my trading plan below for future reference. 1) Observed Rubberex is in up trend based on MA50 above MA200 trend line. 2) Observed VCP formed in Rubberex where the contraction of the price getting smaller. (1st contraction ~30%, 2nd contraction ~38% and 3rd contraction ~9%) 3) Bought Rubberex on 15 April at RM0.840 when the stock attempt to break neckline with strong volume in the morning. 4) Sold half quantity at RM0.965 on 16 April when the stock price rocket up. 5) Follow by remaining quantity at RM1.07 at the same day (16 April) to lock down profit. Blessed to have 21% in 1 day trade.
REducation
by adamkhoosk
4