最後更新日期：2023年09月08日
Based on the Summary from the previous article “Trade Like a Stock Market Wizard” by Mark Minervini, I believe everyone is eager to try and apply these interesting concepts to their own trading to find out potential great growth stocks.
Among various concepts, finding entry points might be the most crucial concern for investors! How should the price volatility contraction pattern mentioned in the book be practically implemented? Are there faster methods to identify volatility contractions other than visual scanning? In this article, We are going to share how to achieve that!
Volatility Contraction Pattern (VCP)
Let’s quickly review the conditions for the formation of the Volatility Contraction Pattern (VCP):
- As depicted in the chart below , when the left side of stock price movement exhibits higher price volatility, and the right side experiences a contraction in price volatility.
- Contraction patterns typically involve 2 to 4 contractions, occasionally extending to 5 to 6 contractions.
- The amplitude of wave retracements gradually decreases, for instance, when a certain wave retracement is half the size of the retracement in the preceding wave.
- The time intervals between wave fluctuations become progressively shorter.
The formation of the Volatility Contraction Pattern (VCP) can be envisioned as a result of the interplay between the supply and demand of both novice and experienced investors. When novice investors hurriedly sell their stocks due to price rally, it leads to increased price volatility.
However, at each bottom of the price swing, experienced investors begin to accumulate positions, causing the stock price to rise rapidly, and this pattern repeats over and over again. This process, where stock shares move from weaker hands to stronger hands, generates multiple price swings, which the author refers to as stock price contractions. As the contractions’ amplitude diminishes, it signifies a weakening selling pressure from novice investors and a stabilization of stock price. At this stage, stock posted a good condition and ready to take off.
When the Volatility Contraction Pattern (VCP) reaches its final stages of contraction, a phenomenon of dwindling trading volume emerges. At this point, investors should be aware that if there is an increase in trading volume, and the price surpasses the previous high to establish a new high, it could present a favorable buying opportunity.
When it comes to actual trading, how can we find the Volatility Contraction Pattern (VCP)? One way is to scan through each price chart, whether it’s on a weekly or daily basis.However, this method can be time-consuming. Are there any more efficient alternatives available?
Using Power Squeeze Indicator quickly identifies volatility contraction.
Instead of spending a lot of time searching for Volatility Contraction Patterns (VCP), we can use a technical indicator to perform the initial screening. Here, we introduce the PowerSqueeze indicator to our readers. The concept of the Squeeze was introduced by John Carter, the author of “Mastering the Trade,” and the PowerSqueeze indicator has been refined by the Growin team. This indicator is highly effective in identifying price volatility contractions and stocks that are preparing for significant price movements. It aligns well with the concept of Volatility Contraction Patterns (VCP).
What is Power Squeeze:
The PowerSqueeze indicator is composed of Bollinger Bands and Keltner Channels. It indicates whether the stock price is accumulating energy, which could lead to larger price movements in the future. The improved PowerSqueeze indicator by the team categorizes the state of energy accumulation into three levels:
- Red Dot: Strong energy accumulation, strong momentum after the breakout, and potential for a longer-lasting trend.
- Orange Dot: Moderate energy accumulation, possibly developing into a strong red signal.
- Pink Dot: General energy accumulation, with a shorter duration of sustained momentum after the breakout.
Power Squeeze Fired:
When the Power Squeeze changes from red, orange, or pink dots to the first gray dot, it is called a “Squeeze Fired.” This indicates that the accumulated energy is starting to release, and the released energy propels the stock price in a single direction, leading to a significant move. But how do we determine whether the stock price will rally or plummet? At this point, you can make a decision based on the direction of the momentum bar on the Power Squeeze indicator.
Case Study of using Power Squeeze and VCP
After understanding the concept of Power Squeeze, let’s take a look at a example of how both concepts can be combined:
(1) NVDA Example: In the NVDA daily chart shown below, steps 1 to 4 meet the requirements of the VCP pattern. Following a volume breakout and consolidation, you can use PowerSqueeze to confirm a buy signal for positioning.
(2) PLTR Example: The same concept can also be applied to the weekly chart. In the PLTR weekly chart shown below, steps 1 to 4 meet the requirements of the VCP pattern. Following a volume breakout and consolidation, you can use PowerSqueeze to confirm a buy signal for positioning.
(3) CHWY Example: Even when all the criteria are met, there can still be failed trades. The CHWY weekly chart example shown below which meets the requirements 1 to 4 of the VCP pattern. While step 5 also satisfies the PowerSqueeze bullish signal, the subsequent price decline from around 50 to 30 highlights the importance of risk management. It’s a reminder for investors to use tools like trailing stop losses or setting stop levels to protect capital and ensure long-term sustainability.
Quickly identify PowerSqueeze then scan for VCP
We can quickly identify Power Squeeze on the Growin platform’s stock screener, then scan for Price Volatility Contraction (VCP) on daily or weekly charts, which can significantly improve our efficiency!
(1) Firstly, go to the stock screener page, and in the Growin Quantitative Indicators section, you can set up the parameters for Power Squeeze:
(2) After clicking on “Search,” you can quickly get a list of all stocks where PowerSqueeze is currently occurring. Then, you can narrow down your search for VCP within this list
This article provides an overview of how to enhance the efficiency of searching for Volatility Contraction Patterns (VCP) using Growin’s PowerSqueeze indicator. If you have any questions, please leave your comment and let us know.
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Click here to watch the complete guide on how to use the Growin Service : https://blog.growin.tv/stockmining-instruction/