Setups › Volatility contraction (VCP)

Volatility contraction (VCP)

From Minervini. In one line: price swings getting smaller near the 52-week high, sellers drying up.

About the names. The famous names are credit for publicly described ideas. Every test here uses our own simplified, fully coded version of the idea, so the numbers show how our code behaved on past prices, not how the named person trades or traded. No affiliation with, or endorsement by, any named person.

1,335

trades tested

39%

win rate

-0.06R

average result

+0.30%

vs Nifty per trade

What it looks like

Mark Minervini's volatility contraction pattern: near its 52-week high, a stock pulls back several times, and each pullback is smaller than the one before, for example 20%, then 10%, then 5%. Volume dries up as the swings get tighter. The chart looks like a coil being wound up.

Why traders use it

Each smaller pullback shows sellers giving up. Weak holders have already sold, and there is little supply left at these prices. When buyers return, the price can move quickly because few people are left to sell to them. The tight final range also gives a clear, close stop.

The exact rule we tested

The close is above the 50-day average, and the 50-day is above the 200-day (an up-trend).
The average daily range of the last 10 days is less than 75% of the 50-day average range (volatility contracting).
The whole 10-day range is under 10% of the price.
Volume over the last 10 days is below the 50-day average (sellers drying up).
The close is within 10% of the 52-week high.

Mistakes to avoid

Calling any sideways move a VCP. The contractions should get smaller one after another.
Buying before the breakout. The pattern is only confirmed when price leaves the tight range on rising volume.
Trading it in a falling market. Minervini himself says most breakouts fail when the market is weak.

How we tested it

Every day from 05 Nov 2024 to 05 Nov 2026, every main-board NSE stock (price ≥ ₹50, turnover ≥ ₹5 crore a day) that showed this setup was bought the next day above its last high, with a stop 1.5 ATR below and a target 2.5 ATR above, and sold after 10 trading days if neither was hit; 0.1% costs per trade. Traders usually hold this setup 5-10 days.

The maths behind the result

Average winner +1.28R, average loser −0.91R, win rate 39%. Expectancy = 39% × 1.28 − 61% × 0.91 = -0.06R per trade. To break even with this payoff you need to win at least 42% of trades. How expectancy works.

A historical simulation, not live trading and not a recommendation.