The relationship between volume and price in stock trading: How to spot turning points amid changes in trading volume?

What is the Price-Volume Relationship? Mastering this Concept Means Grasping the Market Pulse

In stock investing, we often say “Price reflects expectations, volume reflects participation.” The essence of the price-volume relationship is the interaction pattern between stock prices and trading volume, making it one of the most practical predictive tools in technical analysis.

When stock prices fluctuate, accompanying changes in trading volume reveal the true intentions of market participants. High trading volume indicates many participants with aligned views, while low volume may suggest a market in wait-and-see mode. By analyzing this relationship in depth, investors can more accurately judge future trends and seize buying or selling opportunities.

Five Common Price-Volume Relationships in the Stock Market and Their Signal Indicators

The most frequently encountered price-volume phenomena in practice can be categorized into five types, each conveying different market signals:

First Phenomenon: Rising Price, Shrinking Volume — Hidden Risks in an Uptrend

Rising price with shrinking volume refers to a situation where stock prices are increasing, but trading volume is gradually decreasing. On the surface, it may seem positive, but it actually harbors risks.

This phenomenon often indicates: market participants are losing enthusiasm for the rally, and new buyers are insufficient to sustain the upward momentum. Technically, it usually suggests that the short-term rally may be nearing its end, and investors should be alert.

Specifically, when a stock’s price rises while volume shrinks, the original buying power is waning, and the market may be relying on inertia to push prices higher. Without new positive news to stimulate the market, prices are likely to encounter resistance and pull back. From a trading perspective, this is a signal to reduce holdings or adopt a wait-and-see approach, rather than chasing the rally.

Second Phenomenon: Flat Price, Shrinking Volume — Market in Stalemate

When a stock’s price fluctuates within a narrow range and daily trading volume continues to decline, we call this flat price with shrinking volume. This situation typically occurs during a consolidation phase.

The underlying message of flat price with shrinking volume reflects the market’s true condition: investors lack a clear view of the stock’s future direction, with bullish and bearish forces roughly balanced. The number of cautious observers increases, while active traders decrease. This is a typical “building momentum” state.

During this period, the stock may remain subdued for a long time, but once a breakout opportunity appears (such as major positive news or policy changes), the price could experience significant volatility. Therefore, investors should remain patient and wait for a clear breakout signal.

Third Phenomenon: Explosive Volume Drop — A Reflection of Market Panic

Explosive volume drop is one of the most risky price-volume relationships, referring to a rapid decline in stock price over a short period accompanied by a surge in trading volume to historical highs.

This phenomenon is often triggered by major negative news or market panic. When investors, driven by pessimism, sell off en masse, trading volume spikes abnormally, and prices plummet sharply. Many stock crashes in history have been accompanied by typical explosive volume declines.

For example, during the outbreak of COVID-19 in early 2020, stocks across multiple sectors suffered heavy losses. Stocks in hospitality, travel, and related industries experienced sharp price drops along with surging volume, reflecting investor panic over the pandemic’s negative impact.

However, it’s important to note that explosive volume declines can also present investment opportunities. When prices fall due to temporary negative factors, and fundamentals remain unchanged, such panic selling often overcorrects, creating low-entry points for savvy investors. The key is to distinguish whether the decline is an overreaction.

Fourth Phenomenon: Shrinking Volume Decline — Normal in a Correction Phase

Shrinking volume decline refers to a downward trend in stock price accompanied by decreasing trading volume. This contrasts sharply with explosive volume drops.

Shrinking volume decline usually occurs in the following scenarios: after a substantial rally, the stock enters a correction phase, during which selling pressure is modest, and most investors are reluctant to sell. The decreasing volume indicates reduced market participation and weak selling force.

In this situation, the price decline tends to be gentle, avoiding sudden drops. In fact, shrinking volume declines often signal that the correction is nearing its end, and the market is accumulating energy for the next upward move.

Investors should understand that shrinking volume decline is not necessarily ominous; rather, this moderate decline can be more conducive to forming a bottom than a rapid plunge, laying the groundwork for subsequent rebounds.

Fifth Phenomenon: Falling Price, Increasing Volume — Turning Point of Market Divergence

Falling price with increasing volume means that while the stock price declines, the number of participants and trading volume continue to grow. This phenomenon often carries significant reversal implications.

Falling price with increasing volume may indicate two possible scenarios:

Scenario 1: Continued decline — If the selling force remains strong and volume continues to rise as prices fall, it may suggest the downtrend will persist. Caution is advised to avoid bottom-fishing blindly.

Scenario 2: Bottoming out and rebounding — If the price has already fallen to a historical low or a technical support level, increased volume may reflect active accumulation by investors at low prices, preparing for a rebound. In this case, prices often bottom out shortly and then start to rise, with increased volume serving as a pre-reversal signal.

Distinguishing between these scenarios requires combining fundamental analysis and technical patterns. If fundamentals are deteriorating and prices keep falling, caution is warranted; if fundamentals are stabilizing or improving, and prices are at support levels, it may be a buying opportunity.

How to Apply the Price-Volume Relationship in Practice to Find Trading Opportunities?

After understanding these five basic price-volume phenomena, investors need to learn how to apply this knowledge in real trading:

Step 1: Observe the trend of volume changes — Focus not just on absolute volume figures but on whether volume aligns with price movements. Healthy uptrends should be accompanied by moderate volume expansion; top regions often show volume contraction.

Step 2: Combine analysis across multiple timeframes — Don’t rely solely on daily charts; also analyze weekly and monthly volume-price relationships to filter out short-term noise.

Step 3: Watch for divergence signals — When prices reach new highs but volume does not, it indicates divergence, often foreshadowing a weakening upward trend.

Step 4: Use other technical indicators — Combine volume-price analysis with moving averages, support and resistance levels, Relative Strength Index (RSI), etc., rather than relying on it alone for decision-making.

Summary: The Price-Volume Relationship Is the Key to Understanding the Market

The stock market’s price-volume relationship reflects the true contest among market participants. Positive alignment (e.g., rising prices with increasing volume) often indicates a strong trend, while negative alignment (e.g., rising prices with shrinking volume) suggests waning momentum.

Whether it’s a risk signal like rising price with shrinking volume or a reversal indicator like increasing volume during a decline, understanding and applying the price-volume relationship can help investors identify market shifts earlier. However, remember that the price-volume relationship is just one analytical tool; it should not be the sole basis for decisions. Combining it with fundamental analysis, macroeconomic environment, and risk management strategies will lead to more comprehensive investment plans.

Mastering the essence of the price-volume relationship is equivalent to understanding the intrinsic logic of market fluctuations, which is crucial for improving trading success rates.