volatility contraction pattern vcp a rule based screener built for high quality breakouts
Finding stocks that deliver strong breakout moves is not about chasing price. It is about identifying quiet accumulation before the move begins. One of the most reliable frameworks for spotting such setups is the Volatility Contraction Pattern (VCP), popularized by Mark Minervini.
In this blog, we break down a rule-based VCP screener built on sharpely, explaining each filter, its purpose, and the market logic behind it. This is not a theoretical explanation, these are practical screening rules you can use daily.
A VCP is a tight consolidation after a strong uptrend, where:
This behavior signals institutional accumulation. Large investors build positions quietly before a stock makes its next expansion move. The goal of a VCP screener is to catch stocks just before volatility expands again.
Let's first look at how the conditions look on the sharpely screen.
It is looking way too complicated, right? Well, if we understand each condition step by step, it is very easy to comprehend and use! So, let's do it!
This filter removes illiquid and micro-cap stocks where price movements are often driven by speculation rather than institutional demand. VCP works best when institutions are involved, and that requires sufficient market capitalization.
Volume is the fuel for breakouts. This rule ensures that:
Low-volume stocks can show tight patterns, but they often fail when demand does not follow through.
A VCP is not a reversal pattern. It is a continuation pattern. That’s why trend filters are non-negotiable.
This confirms that price is firmly above short-, medium-, and long-term trend levels.
This alignment indicates a Stage-2 uptrend, where institutions are already invested and defending the price.
A VCP forms after a meaningful advance, not from a flat base. This rule ensures the stock has already proven its ability to trend and attract capital.
Stocks that haven’t moved in the past year rarely deliver explosive breakouts.
This means the stock is trading within 15% of its 52-week high.
Why this matters:
This filter eliminates structurally weak setups.
Average True Range (ATR) measures volatility. Dividing it by price normalizes it across stocks.
This rule ensures:
This confirms recent volatility is lower than long-term volatility, a classic VCP signature.
Together, these rules capture volatility contraction, the most important ingredient of the pattern.
This custom metric measures how tightly price has moved over the last ~21 trading days.
A tight range indicates:
The tighter the range, the more powerful the eventual expansion tends to be.
This confirms that trading activity is declining during consolidation.
In VCP setups:
Without volume contraction, a base is often just a distribution.
This screener does not look for breakouts. It looks for stocks preparing to break out.
Each rule plays a specific role:
The result is a high-quality watchlist, not a trade signal.
Well, we have done the hard work for you. We have created and published the screen. You can find it here.
After a stock appears in this screener:
This approach keeps you early, selective, and disciplined.
Screening logic is only as good as its real-world performance. To evaluate whether this VCP framework actually delivers results beyond theory, we backtested the screen as a systematic strategy on sharpely. Here is the summary.
The backtest helps answer a simple but critical question: Does identifying volatility contraction near highs translate into superior risk-adjusted returns over time?
An initial capital of ₹1,00,00,000, invested on February 3, 2023, was tracked using this VCP-based approach.
The portfolio significantly outperformed the benchmark over the same period, highlighting that stocks emerging from tight volatility contractions tend to deliver sustained trend-following returns, not just short-term spikes.
Raw returns matter, but the quality of returns matters more. This is where the strategy stands out.
A Sharpe above 1.5 indicates strong risk-adjusted performance, while a higher Sortino ratio shows that returns were achieved with controlled downside volatility. The beta close to 1 suggests that outperformance was driven by stock selection, not excessive market risk.
The strategy delivered an alpha of 23.26%, meaning it generated returns well beyond what could be explained by market movement alone.
This reinforces the core thesis of the VCP framework:
Stocks under quiet accumulation tend to outperform once volatility expands.
These numbers reflect steady compounding, not extreme dependency on a few outsized winners — an important characteristic for any repeatable strategy.
While drawdowns are unavoidable in trend-following systems, the strategy maintained reasonable downside containment, especially considering the level of outperformance achieved.
This is consistent with how VCP setups behave:
Small losses during failed breakouts, followed by large asymmetric gains during successful trends.
The strategy does not rely on a very high win rate. Instead, it benefits from larger average winners than losers, which is exactly how momentum and breakout strategies are designed to work.
What it tells us:
What it does not tell us:
Backtests validate process, not perfection.
The strength of this VCP screener lies in its balance:
Rather than chasing breakouts, this approach focuses on pre-breakout conditions, where risk is better defined and reward potential is asymmetric.
For investors who value discipline, structure, and repeatability, this screen based on the VCP framework offers a powerful starting point.