HeXun Investment Advisor Zhan Na: Is a price drop with shrinking volume or expanding volume better? 90% retail investors have completely gotten it backwards

On March 20th, Hexun Investment Advisor Zhana said, Do you look at trading volume? When stocks fall, is it better to see decreasing volume or increasing volume? Today, in three minutes, I will help you thoroughly understand the deeper logic behind trading volume, grasp a different perspective on volume and price analysis. If you find it useful, please like and save this content—it will definitely come in handy in practice!

Let’s start with a real trading example: a stock rises sharply from a high level and then continues to decline, with ample time and space for adjustment. Observing the trading volume, during the decline, volume remains extremely low, and the stock price keeps falling, with volume gradually shrinking. In this kind of trend, is the bottom near? Most people might be unsure. Don’t worry, let’s break down the logic: for stocks that decline like this, which is better—shrinking volume during decline or increasing volume?

When stock prices fall with increasing volume, it indicates significant disagreement within the market. Increasing volume means there are both buyers and sellers—some are bullish, some are bearish—leading to high transaction volume. Even though the price is dropping, increased volume essentially shows that buyers are more willing to enter, actively taking over shares, which pushes up volume. Conversely, during a decline with shrinking volume, it suggests that market consensus is forming: many want to sell, but few want to buy, and trading activity continues to decrease. The bears remain bearish, and the bulls are reluctant to enter; buying interest almost disappears. Returning to the earlier example, the stock has been falling for a long time, with volume continuously shrinking, even though the price has dropped significantly, no one is willing to take over. In this kind of downward trend with persistent shrinking volume, it’s very unlikely to truly bottom out—even if volume shrinks to the extreme, the bottom may not have arrived.

Does this logic still apply during an upward trend? For example, a stock shows a clear rise initially, then begins to pull back at a high level, with volume also decreasing. Which is better—shrinking volume during a pullback or increasing volume? If you understand the previous logic, the answer should be clear: during an uptrend, shrinking volume during a correction is actually better. This kind of volume contraction indicates that market participants are reluctant to sell, not because no one wants to buy, but because shares are hard to come by—selling pressure is light. Such stocks usually have limited room for correction and are more likely to stabilize.

But here’s the key question: if volume keeps shrinking during a decline without any increase in volume, can the stock truly bottom out? Obviously not. Short-term pullbacks during an uptrend cannot be achieved by shrinking volume alone; they will continue to oscillate and form a bottom. To restart the upward move, volume must pick up again after the correction, ideally with a strong bullish candle with increased volume. This indicates that selling pressure has been fully digested, and the bulls only need a small force to push the price higher—this is a typical signal that the correction has ended and the stock is ready to move higher again.

Therefore, there is no absolute good or bad in shrinking volume declines versus increasing volume declines; it must be judged in conjunction with the trend and position—this is the core logic of trading volume!

(Edited by: Zhao Yanping HF094)

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