Volatility contraction pattern (VCP)

In a volatility contraction pattern each pullback is shallower than the one before. The swings tighten like a coiling spring while volume dries up, and traders watch for the move that follows.

What it looks like

Look for a stock that pulls back, recovers, and pulls back again by a smaller amount, and again. The lows get less deep, the range narrows, and trading volume fades. The idea is that sellers are running out of supply at each new low.

Try it on real charts

Each chart below is a real stock on a real date. Call it bullish or bearish, then see what happened over the next 10 trading days.

The rules we use

Many chart examples online are loose. In SwipeTrainer a volatility contraction must pass a strict check before it is used:

• At least two pullbacks, and each one is at least 15% shallower than the last.
• A meaningful start: the first pullback is at least 5% deep, so there is something to contract from.
• A tight finish: the last pullback is 10% or less.
• Drying volume: volume falls across the sequence (we look for at least a 15% decline).
• Fresh and unbroken: the last pullback is recent and price has not already run away from the pattern.

How traders use it

Traders who use this pattern watch for price to push above the highs of the recent pullbacks, ideally on a surge in volume, and place a stop below the last tight low. The tighter the final contraction, the less they risk on the idea. As with every pattern, a failed breakout is part of the game.

Common mistakes

• Counting pullbacks that do not actually shrink.
• Ignoring volume. Tight swings on rising volume are not the same thing.
• Buying well after the breakout when the risk is already large.
• Forcing the pattern onto a downtrend.

Practise this pattern on your phone

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Frequently asked questions

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