It is one of five patterns he watches for, and involves price contractions and volume decreases.
Goverdhan Gajjala
Trading strategies can be as unique as fingerprints. The approaches taught by coaches and other traders aren't always transplanted as is. Students often take tips and ideas from a thesis or pattern and integrate them into their own strategies, building a set of repeatable trades and signals to inform their processes.
It's what Goverdhan Gajjala, a 44-year-old, Dallas-based software consultant, did while refining his trading strategy. He began as a swing trader, holding for days to a few months at a time — but gradually refined his approach to become a day trader. The switch made him feel more in control when entering and exiting trades quickly.
Gajjala had taken an online course with Mark Minervini, a veteran trader and a past winner of the US Investing Championship, where he learned how to tame his emotions and trade using a set of rules. In 2023, he decided to test his skills in the competition his coach had previously won. According to the competition founder, Norman Zadeh, Gajjala finished first in the stock division for those trading with more than $20,000, with gains of 805%.
Gajjala trades about five patterns, two of which he shared with Business Insider in previous interviews: a reversal squeeze and a bull flag pullback. The third pattern he looks for, which he picked up from Minervini, is the volatility contraction pattern (VCP). It represents price action that tightens as it moves from left to right.
The VCP pattern can be spotted over multiple days or weeks. But Gajjala uses it for day trades, which can last 30 minutes to an hour. He refers to it as an intraday VCP.
The first sign of the pattern begins with an initial spike in price or the first move up. A series of smaller sell-offs or pullbacks then follow it. If it develops into a VCP, the volatility will decrease in a gradual upward-moving pattern as it continues to find support at the 21-day exponential moving average line on the five-minute chart. There are longer and shorter EMAs that can work, but for the period Gajjala is trading in, he found that the 21-day option is the most consistent.
The contraction pattern must be accompanied by decreasing volume bars after the initial and sudden increase in price. The spike in green volume bars parallel to the first price spike demonstrates this in the chart below. The pullback periods are then accompanied by weaker selling pressure, shown by shrinking red bars as the pattern moves to the right. This pattern will repeat itself until the selling pressure diminishes and the pullbacks become more shallow, narrowing price volatility.
Once the contractions have tightened and the selling volume has diminished, it can be followed by a breakout.
For Gajjala, it's an easier pattern to trade because the contraction period is longer than other patterns he watches for. For example, the bull flag pullback, a spike in price that resembles a flag on the chart, can happen within seconds and as little as two to three candles. It gives him very little time to make a trading decision.
For the VCP, he can watch it for 30 minutes to an hour as the volatility diminishes while the price gradually increases along the 21-day EMA.
"It's more or less very clear and easy to identify," Gajjala said. "And the volume profile will be so neat, and I'll have plenty of time to wait and watch this setup."
The chart below is an example of an intraday VCP. It shows the initial spike in price accompanied by high demand, as demonstrated by the green volume bars. It's followed by tightening contractions and less volume. The "entry" mark on the chart is where Gajjala tries to enter. Here, selling pressure has died down, and price volatility has eased.
Thinkorswim
The danger of this setup is that a trader can be too early to the trade and the chances the pattern breaks up or down are the same, he noted. This means a trader must have more patience to play it.
When Gajjala first began trading the intraday VCP, he was unsuccessful because he would enter the trade before allowing the contractions to develop. He assumed getting in early would increase his gains, but the pattern would usually break down.
Below is an example of a trade Gajjala took on Syntec Optics Holdings (OPTX) on November 17. The stock's price spiked at the stock market open, followed by continued contraction and dropping volume by 11:00 a.m. According to his brokerage statement, he entered the trade buying about 24,000 shares between $7.07 and $8.29 and exited between $8.31 and $8.61.
Thinkorswim
