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VCP Pattern Notes

This document provides 23 points summarizing the consolidation breakout and volatility contraction pattern (VCP) trading strategy. The strategy looks for stocks that had a 50% move in 4-5 weeks followed by a consolidation period of 4-8 weeks with decreasing volatility and volume. It aims to enter long positions on breakouts from these consolidations. Key criteria include identifying VCP patterns, managing risk with strict stop losses, exiting on changes in stock behavior or trend, and allowing profits to run without predefined targets. Understanding this strategy requires reviewing the full materials from its originator, @iManasArora.

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AVIJIT DAS
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3K views2 pages

VCP Pattern Notes

This document provides 23 points summarizing the consolidation breakout and volatility contraction pattern (VCP) trading strategy. The strategy looks for stocks that had a 50% move in 4-5 weeks followed by a consolidation period of 4-8 weeks with decreasing volatility and volume. It aims to enter long positions on breakouts from these consolidations. Key criteria include identifying VCP patterns, managing risk with strict stop losses, exiting on changes in stock behavior or trend, and allowing profits to run without predefined targets. Understanding this strategy requires reviewing the full materials from its originator, @iManasArora.

Uploaded by

AVIJIT DAS
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as TXT, PDF, TXT or read online on Scribd
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As per promise, now I am sharing basic notes on the consolidation breakout & VCP

pattern. This will help people in refining the watchlist created by the scanner
shared by me previously.

Before starting I want to mention that the complete credit goes to @iManasArora for
this setup. He beautifully designing the complete setup within few objective rules.
I find the concept immensely useful, it helped a lot in my trading, and if you find
the basic concept interesting, you should consider getting the webinar from Manas,
as what I am sharing is just a drop from the ocean. Further trading success does
not depend on trading systems, but on your practice, risk management and
psychology. The webinar contains a very useful module on both- risk management &
psychology, and you should consider making these perfect for your trading success.

For those of you who didn't checked the initial criterias for creating the
watchlist, I am giving the link below. Pls go thru it, as this thread is a
continuation of where we left off previously.

https://t.co/P2oOKDkisi

Lets begin-

1- Apart from the seven initial criterias shared previously, you need to further
refine your watch list for stocks which has free float less than 5000 Cr., most
preferably 1000 Cr.

2- We will buy only breakouts, not pullbacks.

3- We will only buy companies which have shown immense strength.

4- The primary idea behind this trading setup is about buying a stock which had
shown explosive move. Here explosive move means atleast around 50% move in last 4-5
weeks. The stock should surge atleast 50% in 4-5 weeks, then we need consolidation
after sharp runup. We will get an entry when this consolidation breaks out.

5- The consolidation should not last more that 4 to 8 weeks. If the stock takes
more than 8 weeks to break, it is an avoidable setup.

6- The explosive move should have huge volume but the consolidation should happen
on low volume only. Volume should dry up once the stock take a pause & moves
sideways after sharp surge.

7- Green days should be made on high volumes & red days should have low volume.

8- Primary idea is if a stock moved significantly in relatively less time, and


going sideways in small box & lack of volume, it is an extremely healthy sign.

9- For further refining, we will look for VCP- volatility contraction pattern in
the consolidation. The prime concept behind VCP is volatility tends to expand after
contraction. We find similar concept in Wyckoff's market structure, where range
bound periods of accumulation & distribution is followed by mark up & mark down
phases where volatility expands significantly.

If we minutely look into this concept, we will find that this whole setup shares
several similar characteristics of Wyckoff's re-accumulation phase.

10-Good VCP ideally has 3 contractions.

11- In VCP, volatility drop should be ideally 50% down with every contraction.
12- Time taken to complete the entire contraction should also drop by around 50% in
subsequent contractions.

13- If VCP has 2 contractions only, the second contraction should have more than
70% contraction.

14-You need to check how many days it will take for stock to move up after
breakout. 5 to 10 days is expected. More than 10 days will raise concerns over the
success probability.

15-Stock is getting shallow pullback & moving up within 5-10 days of consolidation
is Tennis ball action.

16- Check the volume on Green days vs Red Days. These will help you know when you
should remain into the trade & when you should exit.

17- Stoploss should always be 2x 20 Period ATR from enter price. You should trail
this stoploss by calculating 2x 20 Period ATR from every new high made after
entering the trade.

18- Ideally our initial risk should be 0.5% of our entire capital i.e. in case our
trade goes against us, we won't lose more that half percent of our portfolio.

19- We will average up in subsequent consolidations after our initial entry. Every
new entry should be considered as fresh entry & you should do all the necessary
risk management activity before entering the trade.

20- On target front, there is no predefined target of how much a stock can run. If
you keep small targets, you will miss out big moves.

21- As you have a trailing stoploss in form of 2x 20 Period ATR calculated from
swing high, if stock hits this trailing stoploss you should exit.

22- In case you see a "change of character" in the stock- this is actually a very
beautiful wyckoff term not used by Manas but it perfectly goes here- you should
decide exiting from the trade. This change of character should include remaining
too long in consolidation, getting considerable volume on pullbacks etc.

23-Otherwise if the angle of trend turns steep, runs far away from 10 MA &
exhaustion gap appears, lock in your profits.

These are the 23 points I hoped that can help you in understanding the concept &
you also be able to use the scanner. For further learning you should visit Manas's
timeline, he shares all his trades with charts, and rational. He often help with
genuine queries too.

I want to thank you all with hopes that it might help with basic questions. In few
days I am thinking about sharing one of my own work, which can give an initial idea
about when U should take a trade, when U should avoid & when prefer a counter trend
trade.

Till then thanks a lot & lots of Good Luck!

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