Volatility Contraction Pattern (VCP)

Entry Logic

Trigger: Price breaks above the resistance of the final contraction. Confirmation: Increased volume on the breakout. Timeframe: 15-minute chart for pattern, 5-minute for entry. Location: Breakout from the apex of the VCP. Market Condition: Consolidating after a prior trend.

Exit Logic

Profit Target: Measure the largest swing prior to VCP, project from breakout. Scaling Out: Scale 33% at 1R, 33% at 2R, 34% at 3R. Trailing Stop: Trailing 0.75 ATR below price. Signal Failure: Price closes back inside the pattern. Time Expiration: Close all positions after 5 hours if target not hit. Momentum Loss: Close if price fails to follow through after breakout.

Stop Loss Structure

Hard Stop: 0.5 ATR below the lowest point of the final contraction. Soft Stop: Price retests breakout and shows weakness. Max Dollar Loss: $300 per trade. Max Percent Loss: 0.75% of account. Structural Stop: Below the VCP's pivot low.

Risk Management Framework

Risk Per Trade: 1.5% of account. Daily Limit: 4% max loss. Weekly Limit: 9% max loss. Max Drawdown: 15% from peak equity. R:R Requirement: Minimum 1:3.

Position Sizing Model

Sizing Approach: Fixed risk, adjusted for setup quality. Volatility Adjustment: Smaller size for wider contractions. Conviction Sizing: A+ setups get 1.2x size. Scaling In/Out: Scale out as per exit logic.

Trade Filtering

Market Conditions: Avoid bear markets for long VCPs. Setups: Clear 2-3 contractions with decreasing volatility. Instruments: Growth stocks, strong sector leaders. Time Restrictions: Avoid end-of-day trading. Chop/News Avoidance: No trades around earnings.

Context Framework

Trend Direction: VCP often forms after an uptrend (for bullish VCP). VWAP Relationship: Price consolidating around VWAP. MA Relationship: MAs coiling together. Higher TF: Daily chart shows strong prior trend.

Trade Management Rules

Breakeven: Move stop to breakeven at 1R. Scale Out: As per exit logic. Add Size: Never add to a losing position. Fast vs Slow Moves: Use tighter stops on fast, impulsive breakouts.

Time Rules

Optimal Window: 9:45 AM - 12:00 PM EST, 1:30 PM - 3:00 PM EST. Times to Avoid: First 15 minutes of market open. Session Notes: VCPs often develop during quieter periods.

Setup Classification

A+/A/B/C Criteria: A+: Perfect contractions, high volume breakout. A: Good contractions, strong volume. B: Fewer contractions, decent volume. C: Unclear pattern, low volume.

Market Selection Criteria

Instruments: Technology, healthcare, consumer discretionary stocks. Volume: Average daily volume > 2 million shares. Volatility: ATR (14) > $1.50.

Statistical Edge Metrics

Win Rate: 45%. Avg Win: 3.5R. Avg Loss: 1R. Profit Factor: 1.7. Expectancy: 0.57R per trade.

Failure Conditions

Strategy Fails: Breakout on low volume. Price closes back inside the pattern. Overall market turns bearish rapidly.

Psychological Rules

Mental Discipline: Patience is key for pattern formation. Avoid premature entry. Trust the setup.

Advanced Components

Regime Detection: Use momentum indicators to confirm prior trend. Filters: Relative strength filter. Correlation: Look for VCPs in leading stocks/sectors. MTF Alignment: 15-min pattern, 5-min entry, daily trend.

Location

Strongest: Leading stocks in strong sectors. Weakest: Lagging stocks, bearish markets.