The relationship between price and volume determines the trading opportunity; you must understand these 5 signals.

The most easily overlooked aspect in stock trading is often not the price itself, but the volume behind the price movement. Whether it’s an upward move or a downward trend, some people profit from the surge, while others hit the ceiling; some get caught in the pit, and others buy the bottom. The key difference lies in whether you can read the relationship between volume and price.

What is the volume-price relationship?

Simply put, the volume-price relationship is the interaction logic between stock price and trading volume. When the stock price moves, volume determines whether the move is genuine or just a bluff. High trading volume = high market participation = strong trend credibility; low volume = mainly retail follow-the-leader = risk hidden in the corner.

The table below summarizes the 5 most common volume-price patterns in the market, so you can quickly understand what each situation indicates:

Volume-Price Signal 1: Price rises, volume shrinks — The easier the rise, the greater the risk

The stock price is climbing, looking great. But the trading volume is shrinking, like climbing halfway up a mountain with fewer and fewer followers—indicating that those lacking stamina are gradually descending.

What does this situation indicate? Buying momentum in the market is weakening, only a few are still holding on. The stock price seems to be rising, but in fact, it lacks sufficient market approval. It may continue to rise in the short term (technical rebound), but its sustainability is questionable.

Looking at Tesla’s trend in early 2017: the stock kept hitting new highs, but volume was decreasing. What happened in the end? The upward momentum gradually exhausted itself, followed by a correction. Alibaba also experienced a similar situation—after a period of rising prices with shrinking volume, the stock entered consolidation.

Trading suggestion: Don’t chase the high at this point. If you already hold the stock, consider partial profit-taking.

Volume-Price Signal 2: Price flat, volume shrinks — Before a big move, expect turbulence

The stock price oscillates within a certain range, like preparing for a big move. Meanwhile, volume keeps decreasing, and market participants are reducing—this is a signal of potential buildup.

Often, volume contraction during consolidation lasts for weeks or even months. The market falls into a dull phase, investors are watching each other, but this calmness is often the lull before the storm.

Nvidia experienced this kind of sideways contraction before a strong rally. Conversely, Boeing’s situation was the opposite—after sideways volume contraction, the stock began testing support levels.

Trading suggestion: This is the time to set up for an ambush. Prepare your strategy and wait for a confirmed breakout direction before acting.

Volume-Price Signal 3: Explosive volume drop — The most terrifying moment in the market

The stock price plunges rapidly, but volume surges—this is a warning signal all traders should heed. What does explosive volume decline mean? Panic selling is happening, large holders are cutting losses, and market confidence is collapsing.

In 2020, during the COVID-19 outbreak, Hilton (HLT) stock plummeted with volume soaring. The outlook for hotels and travel was bleak, and investors rushed to exit. In such cases, the stock may continue to fall, with huge risks.

But here’s an interesting reversal: Estée Lauder announced disappointing earnings in September 2023, causing a sharp drop in stock price and a volume spike. The market overreacted. What happened afterward? The stock bottomed out and rebounded, and those who bought in panic made substantial profits.

Trading suggestion: Explosive volume decline is both a risk warning and a potential hidden treasure. If a fundamentally sound company faces panic selling, it might be a good entry point—wait for confirmation signals.

Volume-Price Signal 4: Downtrend, volume shrinks — Nobody cares about this decline

The stock price is falling, but volume is decreasing. What does this mean? Simply put, the market is not interested in this decline. No panic selling, just a silent exit.

This kind of volume contraction during a downtrend often occurs during correction or consolidation phases. Investors are neither optimistic nor pessimistic—they are waiting—for new information, for a new direction.

Netflix experienced this kind of volume-shrinking decline in 2018, with the stock slowly drifting down without intense volatility. Facebook in summer 2022 was similar—lacking catalysts, the stock gradually slid without triggering panic.

Trading suggestion: Downtrend with shrinking volume isn’t necessarily a buy or sell signal. Stay observant and wait for volume to confirm the true trend.

Volume-Price Signal 5: Price drops, volume increases — A turning point behind the decline

The stock price is falling, but volume is increasing. On the surface, this looks negative—more and more people are selling. But behind this, there are two possible scenarios:

Possibility 1: The decline will continue. Panic selling by holders, strong bearish forces, and the stock may break lower.

Possibility 2: A bottoming rebound is imminent. When the stock drops to a sufficiently low level, increasing volume during a decline may indicate: retail investors are cutting losses, while savvy investors are starting to buy. This is a sign of reversal.

Looking at Apple at the end of 2018: iPhone sales struggles combined with the US-China trade war shadows caused a sharp decline and rising volume. The market was pessimistic. But who bought Apple at that time? Those who did, later made huge profits.

Another example is BlackBerry (BB) in 2012: as smartphones eroded feature phone markets, investors gradually abandoned BlackBerry. The stock kept falling with increasing volume—initially. But at a certain point, brave funds started buying against the trend. The stock bottomed out and rebounded, and perceptive traders achieved a turnaround.

Trading suggestion: Increasing volume during a decline signals a potential turning point. To determine whether it’s a continuation of the decline or a rebound, you need to combine support levels, fundamentals, and market sentiment for confirmation.

How to trade using the volume-price relationship?

Once you understand these 5 volume-price patterns, trading becomes more skillful:

Confirm strong signals: Price rise with increasing volume (true rise) is 100 times more credible than price rise with shrinking volume (false rise). Volume combined with price action makes the trend truly established.

Risk warning: When signals like price rise with shrinking volume or explosive volume decline appear, raise alert immediately. It doesn’t mean you must stop-loss, but you should reassess the risk.

Capture oversold rebounds: When price drops and volume reaches extremes, especially if the stock hits new lows without fundamental deterioration, it’s often a good opportunity for bottom fishing.

Breakout judgment during consolidation: During prolonged flat volume, a sudden increase in volume signals a breakout is coming. Prepare your strategy in advance to avoid being caught off guard by the breakout direction.

Final words

The volume-price relationship is not an infallible predictive tool; it’s just a mirror reflecting market sentiment. When combined with technical indicators, fundamental analysis, and risk management, the volume-price relationship can unleash its full power.

True trading masters are not necessarily the ones who sniff out the trend fastest, but those who best use the volume-price relationship to validate their judgments. Next time you analyze the market, ask yourself: what is the volume behind this rise or fall telling me?