Thread by @nathansha_d

Volatility Contraction Pattern - a thread

The concept is exactly what the name suggests. It is a part of technical analysis in trading. The idea is to find stocks which show clear signs of volatility contractions.

(1/n)

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Technical analysis is all about finding stocks which are under institutional command. There are various parameters to find this. Volume, volatility contraction patterns etc.

(2/n)

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The big guys accumulate from retail holders. The stock sees a dip, which forces the retail investors to panic and exit. This process is repeated over and over to get the weak holders out. Here the stock moves from weak hands to strong hands i.e. institutional investors. (3/n)

Let me use the eg given by @markminervini. Imagine a wet towel. The 1st time you squeeze, lots of water comes out. In the 2nd time, comparatively lesser water. And in the 3 rd , the towel is almost dry, and only a few drops fall. The water here are the retail investors.(4/n)

Note
Each contraction should be smaller than the previous. Say the stock dipped 40% in the 1st contraction, then ideally it should dip around 20% in the next and 10% in next.
Each contraction should be of a lesser time frame than the previous
Dip should be on low volumes (5/n)

After the weak guys are out, the supply is almost dead with only the institutions holding the inventory. Here even the minutest demand will shoot the price up. A smart trader will get in the rally soon after the breakout and bag some gains from this game of institutions. (6/n)

Here I will use the example of #PTC
The stock formed a clean 3T VCP
The stock fell 45% in the first instance, 27% in the second and only 18% in the third. During the fall, the volumes were low and the bars tight. After forming a good base, the stock shot up close to 50%
(7/n)

Also note the number of days of each contraction in #PTC. There had been a significant fall in the period of contractions from the previous one. This form of pattern is popularly known as the cup & handle. (8/n)

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Now check the chart of #CSBBANK. Another eg of a 3T VCP breakout (9/n)

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There are various patterns to check for contraction. A contraction is only depicting lesser volatility in a stock, which will lead to breakouts. Will cover breakout patterns in a separate thread soon. (10/n)

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VCP can be seen in various time frames. From daily to even hourly. It is concept which helps traders analyze the fate of the stock.
(11/n)

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Thread in Summary:
- Look for accumulation
- Check if the stock is forming a pattern of its own
- The dip should always be on low volumes
- The stock should recover from the dip and come back to its support level
- Ideal buy is at breakout level / pocket pivot
(12/n)