VCP Breakout Setups

Mark Minervini and the Volatility Contraction Pattern

Mark Minervini won the US Investing Championship in 1997 with a 155% return for the year — an exceptional result in a year that was good for the market overall, but not one that passively explained triple-digit returns. Over 5.5 years of competition participation, his annualised return exceeded 35%. He subsequently distilled his methodology in the 2013 book Trade Like a Stock Market Wizard, which introduced the Volatility Contraction Pattern to a broad audience of active traders.

The core observation behind the VCP was deceptively simple: before the most explosive stock moves, the stock went quiet. Price range compressed. Volume dried up. Then — on above-average volume — it broke out to new highs. Other traders had noticed similar phenomena, but Minervini was precise about the structure. It was not just one quiet period. It was a sequence: each successive consolidation base had a smaller price range than the one before it. A 25% pullback, then a 15% pullback, then a 10% pullback, then a 6% contraction. The pattern contracted systematically toward a breakout point.

The insight that unified this observation was supply absorption. Each pullback in the pattern represented another wave of selling — investors who bought earlier, lost patience, and sold. Institutions that had identified the stock's thesis were absorbing that selling quietly, week by week. Each successive pullback became smaller because fewer sellers remained. The supply available at current prices was being systematically removed. By the time the final contraction completed, supply was nearly exhausted. A relatively modest increase in demand was sufficient to trigger a disproportionate price move — because there were almost no sellers left to meet that demand.

This is why the VCP is not simply about a stock being near its highs. It is about the specific process that brought it there — a measurable compression of volatility over successive bases that indicates systematic institutional accumulation rather than coincidental price drift. The pattern structure is the evidence of the process. And in a universe of 2,000 to 3,000 listed NSE stocks, maybe 20 at any given time are genuinely coiled springs. Finding them manually would take days. The scanner finds them in seconds.

The Coiled Spring — Why VCP Setups Are Different

Consider a steel spring. When relaxed, it contains zero potential energy. You can see its full length and judge its size easily. Now compress it. Push the coils together until the spring is half its original height. It looks smaller. It appears less impressive. But it is now loaded with potential energy — a compressed weapon. The moment you release the compression, that stored energy converts instantly to kinetic energy in a burst far more powerful than anything the spring could produce in its relaxed state.

This is precisely what is happening during a Volatility Contraction Pattern. The stock's price range is the spring. Each successive base — tighter than the last — is another turn of compression. The stock is not going sideways out of weakness. It is being compressed by deliberate institutional accumulation. And the more that spring gets squeezed, the more explosive the release is going to be when it finally lets go.

This is why the counterintuitive instruction — do not buy a stock as it is actively moving; wait for it to consolidate and compress — is actually the correct one. Most traders are drawn to motion. They want to see momentum, news, analyst upgrades, price action. But the best time to enter a VCP candidate is during the quiet phase before the motion — specifically, just as the compression completes and the breakout trigger fires.

The key distinction between a VCP and a random sideways consolidation is that the VCP's compression is systematic and progressively tighter. Random sideways trading produces inconsistent ranges. Distribution patterns produce gradually widening ranges (selling pressure increasing, not decreasing). Only genuine accumulation produces the precise progressive narrowing that defines the VCP — smaller base after smaller base, until the spring is fully loaded.

Supply Absorption — The Parle-G Factory Analogy

To understand why VCP breakouts can produce such dramatic price moves, it helps to step away from stock charts for a moment and think about something everyone in India understands: Parle-G biscuits.

Imagine a Parle-G biscuit factory serving a city. The supply chain works in four phases:

Connect this directly to the VCP chart structure. The first pullback (the largest base) is Phase 2 — supply is disrupted as the first wave of weak hands sells. Institutions absorb it quietly. The second base is Phase 3 — supply is rationing; fewer sellers at lower prices. The final tight contraction is Phase 4 — supply exhaustion. Volume dries up because there is almost no one left to sell. The price seems to "get stuck" at the high level — not because buyers are desperate, but because sellers have run out of shares to sell. The moment a catalyst or simply institutional demand steps in, price goes vertical through the breakout level because there is nothing to stop it.

The "price stuck" signal is one of the most reliable signals in supply absorption logic. When a stock sustains its price at a high level for days or weeks without pulling back significantly despite mediocre volume, that is not indecision. That is evidence that sellers have been exhausted. The supply is gone. The coiled spring is fully loaded.

The Three Elements of a Classic VCP

A classically formed VCP has three measurable, observable elements. Each can be confirmed on a price chart. Together they constitute the pattern — none alone is sufficient.

All 11 Scanner Conditions — Decoded in Plain English

The scanner applies eleven distinct conditions to every NSE stock. A stock must pass all of them to appear in the VCP tab. The conditions are organised into five logical gates, each encoding a specific dimension of the VCP logic. No mention is made of how the scanner is built technically — what matters is understanding what each condition checks and why it exists.

Gate 1 — The 52-Week Position Check (2 Conditions)

Gate 2 — The Golden Alignment / Trend Stack (3 Conditions)

Gate 3 — The Small-Cap Focus & Price Band (2 Conditions)

Gate 4 — The Clean Signal Filter (2 Conditions: Non-F&O + Non-ETF)

Gate 5 — The Momentum Regime (3 Conditions)

All 11 Conditions — Master Reference Table

Gate	Condition	Plain English	Why It Exists
Gate 1	Close ≥ 52W High × 0.75	Top 25% of annual range	Eliminates overhead supply army; requires blue-sky positioning
Gate 1	Close ≥ 52W Low	Above annual low	Sanity check; confirms genuine range and positioning
Gate 2	Close > SMA(200)	Above macro trend	Institutional money can participate above the 200-day
Gate 2	Close > SMA(50)	Above intermediate trend	Intermediate uptrend intact; not in correction phase
Gate 2	SMA(50) > SMA(200)	Golden Cross confirmed	Full trend alignment; not transitional, fully confirmed
Gate 3	Market Cap ≤ ₹30,000 Cr	Small/mid-cap only	Elephant in bathtub; same capital = larger % supply removal
Gate 3	Close ≥ ₹100	Above penny stock threshold	Bid-ask spreads meaningful; pattern % analysis reliable
Gate 3	Close ≤ ₹3,000	Below high unit-price cutoff	Controls for distortion in very high priced names
Gate 4	Non-F&O stocks only	Cash market only	Volume = conviction; no derivatives contamination
Gate 4	Non-ETF only	Individual companies only	ETFs have no organic supply/demand to analyse
Gate 5	RSI(14) > 50	Above momentum equator	Distinguishes accumulation from distribution masquerading as base
Gate 5	Volume > 50,000	Minimum liquidity floor	Ensures executable position size without market impact
Gate 5	Daily % Change > 0	Green on the day	Active participation; buyers present today

Why Small-Caps? The Asymmetric Reward Logic

Large-cap VCPs exist. They can be well-formed and technically valid. But they rarely produce the same percentage moves as small-cap VCPs — and the reason is structural, not coincidental. It comes down to free float, institutional accumulation mechanics, and what happens when supply is finally exhausted.

In a ₹5 lakh Crore market cap company, an institution allocating ₹500 Crore to build a position is buying 0.01% of the company. That buying is absorbed by the vast supply available at every price level. The accumulation footprint is minimal. When the breakout comes, there is still enormous supply overhead from the millions of investors who hold shares. The move is capped.

In a ₹2,000 Crore market cap company, an institution allocating ₹50 Crore to build a position is buying approximately 2.5% of the entire company. That buying over several weeks, spread across the price range, systematically removes supply. By the time the position is built, a meaningful fraction of the available float has been absorbed. On breakout, even moderate retail buying encounters almost no supply — and price moves sharply because there are very few sellers left at any price near the breakout level.

VCP vs Darvas Box — Two Different Pattern Languages

The Volatility Contraction Pattern and the Darvas Box are often mentioned together in discussions of pre-breakout consolidation patterns. Both represent supply compression before a move. Both produce tightness in price. But they are geometrically different, location-dependent in different ways, and biased differently in terms of trade direction.

The VCP (Minervini, 2013) is shaped like a wedge or triangle that progressively narrows. The price range gets tighter with each successive base. Critically, the VCP must form below a key resistance or supply area — it is location-specific. A VCP forming in the middle of a downtrend is not an opportunity; it is a continuation trap. The pattern carries a bullish bias only — we buy the upper breakout. The stop goes below the low of the final base.

The Darvas Box (Nicholas Darvas, dancer-turned-trader) is shaped like a rectangle — price ping-pongs between a clear floor and a clear ceiling. The box can form anywhere in a trend: at the bottom of a recovery, midway through a move, or near the top. It is location-independent. And it carries a bidirectional bias: if price breaks through the ceiling, buy; if it breaks through the floor, sell or go short. Both outcomes are valid trade signals in the Darvas framework.

The Visual Audit — What the Scanner Cannot See

The scanner is a mathematical filter. It can see numbers: closing prices, moving averages, RSI values, market capitalisation, volume counts. What it absolutely cannot see is the shape of the consolidation, the quality of the contraction, or whether the stock has a structural anomaly that makes the setup unsound. The scanner is blind to structure. That is why the visual audit — the human review layer — is not optional. It is the step that separates a genuine coiled spring from a statistical false positive.

There are three specific things to check during the visual audit. Each catches a different category of false positive.

Visual Audit Step 1 — The Basketball Rule

Drop a basketball from shoulder height. The first bounce reaches your waist. The second reaches your knee. The third reaches your ankle. Then it rolls flat. Each successive bounce is noticeably smaller than the previous one — this is the energy dissipating progressively.

On the VCP chart, this translates directly: T1 might be a 20% pullback, T2 a 10% pullback, T3 a 3–4% pullback. Each wave noticeably smaller than the last. This is what you are looking for on the chart — the progressive diminution.

Visual Audit Step 2 — The Volume Truth Detector

Volume is the Truth Detector of technical analysis. Look at the volume bars on the far right of the chart during the final contraction base. They must be dead — well below the 20-day average volume. Ghost town. The quieter the better. This is what supply exhaustion looks like on the volume axis: sellers have run out of shares to sell, so there is almost no one offering stock. The market is waiting.

Visual Audit Step 3 — The Lifetime High Anomaly

The scanner picks up stocks that are near their 52-week highs. Occasionally, this includes a stock that has been rocketing straight up to its all-time high without any consolidation at all — a vertical move that has only just arrived at the high. This is a trap.

The Execution Playbook — From Candidate to Trade

The scanner has done its job. The visual audit has confirmed the setup. Now comes the execution: converting a chart confirmation into a precisely defined trade with a specific entry price, stop level, and target. This is not a discretionary judgment call — it is a protocol.

Step 1 — Identify the Pivot Point

The pivot point is the absolute high of the final, tightest contraction base. Not the 52-week high. Not the current price. Not the high of the pattern overall. The high of the most recent, smallest base — the final compression before the release. This is your breakout level.

Step 2 — Place the Buy-Stop Limit Order

Do not buy inside the base. Buying inside the contraction base is entering before supply absorption is confirmed as complete. The entire premise of the VCP execution is that the breakout itself — price clearing the pivot — is the confirmation signal.

Place a buy-stop limit order just above the pivot point with a small buffer of 0.1%–0.2%. Example: if the pivot is at ₹102, place the order at ₹102.20. This buffer ensures that the breakout has genuinely triggered before you are pulled in. The beauty of this approach: if the market ignores the stock and it never triggers, your order never fills and you have zero cost. If buyers rush in and the breakout fires, momentum itself pulls you into the trade at a controlled price.

Step 3 — Volume Confirmation

On the breakout day, volume must be at least 1.5 times the 20-day average volume. This is the institutional footprint. When institutions step in to buy the breakout, they move size — volume spikes. A breakout on below-average or average volume is a potential trap: retail buyers pushing price up with no institutional support. The move is likely to stall and reverse.

Step 4 — Stop-Loss Placement

The stop-loss must be placed strictly below the low of the final contraction base. This is the logic: if the pattern thesis was correct — that supply was absorbed and institutions accumulated — then price should not fall back below the level it was already trading at during the final base. If it does, the thesis is wrong. The supply absorption was incomplete, or worse, the pattern was distribution masquerading as accumulation. Exit without hesitation.

Example: pivot at ₹102, final base low at ₹98, stop at ₹97.90. Risk: approximately 4% from entry. Target at 2:1 reward-to-risk minimum = ₹110 (20% above entry on a 5:1 target). Define all three numbers before placing the order.

Step 5 — The Free Ride Technique (The Harvest Rule)

The Free Ride is the trade management rule that converts 20% trades into potential multi-baggers without the psychological cost of watching a winner turn back to breakeven.

When the stock reaches +20% from entry (the Harvest Rule): sell 30%–50% of your position at the open to bank profits. Simultaneously, move the stop-loss on the remaining shares to your exact entry price (breakeven). You have now locked in a guaranteed profit on the sold portion. On the remaining shares, the worst case is now breaking even at entry. You literally cannot lose money on this trade anymore. You are playing with house money.

The complete asymmetric math at work: risk 4% on entry, harvest 30–50% at +20%, run the remainder at breakeven stop toward a 60%–200% potential target. Even in a scenario where the trade only reaches the harvest level and then reverses to breakeven on the remainder, the net result is a meaningful positive return on the full initial position. And when the trade extends, the upside is uncapped.

From VCP Tab to Trade Setup — The Morning Workflow

The scanner finds the coiled spring. The visual audit confirms its tension. The execution protocol converts confirmation into a live trade. Here is how these three phases connect into a practical pre-market morning workflow.

VCP vs Stage 2 — Two Different Setup Types

Finmagine Trader's VCP tab and Stage 2 tab are both momentum screeners, but they capture fundamentally different setup types. Understanding the distinction helps traders allocate their research time and size positions appropriately.

Common VCP Mistakes in Indian Markets

The VCP methodology is well-documented but routinely misapplied. These are the most common mistakes observed when traders use the framework in Indian markets.

• Treating RSI > 50 as overbought. RSI 50 is the minimum positive momentum threshold, not an extended or overbought reading. Overbought in conventional analysis begins at RSI 70. A VCP candidate with RSI at 55 has only just crossed the positive threshold — it is not stretched. Many of the best VCP breakouts occur with RSI in the 55–65 range as the stock builds momentum through the base before the breakout.
• Entering before the breakout. Buying into the contraction base is buying before supply absorption is confirmed as complete. The whole premise of the VCP is that the breakout — on expanding volume above the pivot — is the signal that supply has been exhausted and institutional demand has taken over. Anticipating this by buying inside the base accepts higher time risk and does so without the confirming signal that justifies the trade.
• Chasing extended stocks instead of waiting for bases. Stocks running straight to all-time highs without a contracting consolidation are not VCPs. They are extensions. Buying an extended stock — one that has rallied 40% in six weeks without pausing — is buying at the point of maximum short-term risk, not minimum. Wait for the stock to pause and build a base before evaluating it as a VCP candidate.
• Using market orders on small-cap breakouts. Non-F&O small-caps have wider bid-ask spreads and lower daily liquidity than large-caps. A market order on a ₹200 stock with a typical spread of ₹2–3 means paying 1–1.5% above the quoted ask in a fast-moving breakout. Use limit orders at or near the breakout level to control execution price.
• Expecting every VCP tab stock to break out. The scanner identifies candidates, not certainties. Many stocks in the VCP tab will fail to produce a classically formed pattern on chart review. Of those that do have clean patterns, some will resolve downward rather than up. The screener reduces the search universe from 2,000+ stocks to 20–40. The hit rate within that filtered list depends on chart confirmation and broader market conditions.
• Applying large-cap stop-loss widths to small-cap trades. Small-caps have wider intraday ranges and more frequent false breaks. A stop placed as tightly as 2–3% below entry on a small-cap is likely to be triggered by noise. Use the low of the final base as the stop reference and compensate for the wider stop with a proportionally smaller position size.
• Ignoring the non-F&O nature of the position. In a large-cap F&O stock, a trader who wants to reduce exposure can buy puts or sell futures. In a non-F&O small-cap, the only exit is selling shares in the cash market. Plan exits explicitly before entering. Know the liquidity conditions at your intended exit price. Do not assume you can hedge your way out of a deteriorating position.
• Ignoring the Score column. A VCP tab stock with Score 1 passes only the VCP criteria. A stock with Score 3 or 4 also passes Stage 2, Near 52W High, or High Volume simultaneously. The additional signal confluence materially improves the quality of the setup. Prioritise Score 3–4 stocks for deeper chart analysis before moving to Score 1 candidates.
• Skipping the Free Ride technique. Many traders find a clean VCP, enter correctly, ride it to +15% or +20%, and then — gripped by fear of losing the gain — exit the entire position. This works fine when the trade goes to the harvest level and no further. But it eliminates participation in the rare trades that extend to 60%, 100%, or more. The Free Ride technique is specifically designed to solve this psychological problem: sell enough to eliminate fear, keep enough to capture the extended move.