Published on: August 23, 2024
Are You Following This Mark Minervini Strategy?
If you are an avid stock market trader or an investor, you may have come across the name Mark Minervini. He is a renowned stock trader and author of the book Think & Trade Like a Champion, where he outlines his winning trading strategies.
One of the standout methodologies he discusses is the Volatility Contraction Pattern (VCP), a powerful template for identifying stocks poised for significant moves.
Minervini’s strategies have been popularized among traders for their structured approach and focus on minimizing risk while maximizing returns. If you’re looking to enhance your trading performance, understanding and implementing Minervini’s VCP could be a game-changer. Let’s dive deep into this strategy, its rules, and how you can leverage tools like Definedge’s RZone to identify potential stocks.
Understanding the Volatility Contraction Pattern (VCP)
The VCP is a price pattern that signifies a series of narrowing price ranges, indicating reduced volatility and consolidation. This contraction in price ranges typically precedes a breakout, suggesting a potential entry point for traders. The underlying principle is that volatility tends to contract before a significant price movement, often resulting in explosive upward momentum when the breakout occurs.
Mark Minervini’s VCP is not just about identifying a chart pattern but involves a set of criteria that a stock must meet before it can be considered a viable trade. This ensures that traders are not only looking for a breakout but are also selecting high-quality stocks with strong fundamentals and favourable technical indicators.
The Template Rules Explained
To effectively use the VCP strategy, Minervini outlines specific rules that help traders filter stocks with the highest potential. Here’s a breakdown of the rules and their significance:
1. Stock Price Above the 150-Day and 200-Day Moving Average Lines
Why it Matters: This rule ensures that the stock is in a long-term uptrend. When the price is above both the 150-day and 200-day moving averages, it indicates a bullish sentiment, as these moving averages are commonly used to gauge long-term trends.
2. The 150-Day Moving Average is Above the 200-Day Moving Average
Why it Matters: This is a confirmation of the bullish trend. When the 150-day moving average is above the 200-day moving average, it suggests that the stock has been performing well over a more extended period.
3. The 200-Day Moving Average Line Has Been Trending Up for at Least 1 Month (Preferably 4 to 5 Months)
Why it Matters: A rising 200-day moving average indicates sustained upward momentum, reinforcing the strength of the bullish trend. This rule helps in filtering out stocks that might have only recently moved above their moving averages but do not have a strong upward trajectory.
4. The 50-Day Moving Average is Above the 150-Day Moving Average and the 200-Day Moving Average
Why it Matters: This setup shows that the stock has strong intermediate momentum, adding another layer of confirmation to the bullish trend. It indicates that the stock is not only in a long-term uptrend but also gaining strength in the shorter term.
5. The Current Price is at least 25% Above Its 52-week Low
Why it Matters: This criterion ensures that the stock is not in the lower end of its price range over the past year, which could indicate weakness. Being 25% above the 52-week low suggests that the stock has made a significant recovery and is in a stronger position.
6. The Current Price is Within at Least 25% of Its 52-Week High
Why it Matters: Being close to its 52-week high indicates that the stock is in a strong position and potentially gearing up for a breakout. It shows that the stock has been able to maintain its gains and is not far from its recent peak, which is a bullish sign.
7. Current Price is Trading Above the 50-Day Moving Average
Why it Matters: This rule ensures that the stock is in a short-term uptrend, further confirming the bullish bias. A stock trading above its 50-day moving average typically indicates near-term strength.
8. RS Score Reported in Investor’s Business Daily is No Less Than 70
Why it Matters: The Relative Strength (RS) score is a key indicator used to compare a stock’s performance to the rest of the market. A score of 70 or higher means that the stock is outperforming 70% of all other stocks, which strongly indicates relative strength.
Calculating the RS Score and Other Indicators
Minervini emphasises the importance of the RS score, which ranks a stock’s performance relative to the rest of the market.
At Definedge, the RS score is calculated based on a performance ranking table matrix, providing a clear view of how a stock compares to its peers.
Additionally, other crucial metrics, such as price retracement from 52-week highs and lows, are displayed in the output column. This allows traders to gauge the potential risk and reward before entering a trade.
The output column also displays the pivot point, a critical level that acts as a short-term price breakout. Identifying the pivot point is essential for traders using the VCP strategy, as it helps pinpoint the precise moment to enter the trade.
One of the challenges of implementing the VCP strategy is finding stocks that meet all the criteria. Fortunately, tools like Definedge’s RZone simplify this process by scanning the market for stocks that fit the VCP template. The RZone scanner lets traders quickly identify potential candidates without manually sifting through hundreds of charts.
Scanning for VCP Stocks Using Definedge’s RZone
The RZone scanner is designed to automate the rules of the VCP strategy, making it easier for traders to focus on analysis and execution rather than tedious stock screening. Follow these steps:
- Login into RZONE account with your credentials.
- Click on the Menu on the left
3. Select Group and Click on Scan
4. Here is the result for NSE All Sectors
So, are you following this Mark Minervini strategy? If not, now might be the perfect time to start!