Master the relationship between price and volume, and understand the true sentiment of the market from trading volume.

In cryptocurrency, stocks, and other asset trading, price fluctuations are often just surface phenomena; the true market forces are hidden in changes in trading volume. The relationship between price and volume, this well-known concept, essentially boils down to: how price and trading volume coordinate can reflect whether market participants are genuinely optimistic or just watching from the sidelines.

What is the volume-price relationship?

The volume-price relationship simply refers to the interaction between trading volume and price movement. When an asset’s price rises or falls, the accompanying trading volume reveals the true thoughts of market participants—are they genuinely buying or being forced to follow the trend? Are they panic selling or rationally adjusting?

Investors can more accurately judge whether the subsequent trend will continue or reverse by observing this correlation. Instead of just looking at price changes, it’s better to analyze the market sentiment behind the trading volume.

Five common volume-price patterns and their meanings

1. Price rises, volume shrinks: declining momentum

The stock price continues to rise, but trading volume decreases. What does this contradictory phenomenon indicate?

It exposes a risk signal: Although the price is still climbing, the “popularity” supporting this rise is waning. The buyers who previously pushed the price higher are gradually disappearing, and new buyers are less willing to follow. The market begins to enter a wait-and-see mode. This usually suggests that the upward momentum may weaken, and a technical correction could occur in the short term.

Tesla in early 2017 experienced this situation, with the stock price moving within an upward channel, but each rally was accompanied by decreasing volume. The same pattern appeared during certain rising phases of Alibaba, where the stock hit new highs while volume shrank, eventually leading to a correction shortly after.

Trading insight: When you see rising prices with shrinking volume, be alert—this could be a sign of distribution, not a good time to chase the trend.

2. Price stable, volume shrinks: entering no-man’s land

The stock price oscillates within a certain range, neither rising nor falling, while trading volume becomes increasingly sparse. This “price stagnant, volume even lower” situation indicates market confusion; investors lack a clear judgment about the future, and no one wants to act first.

Such consolidation often precedes a major move, but whether it will break upward or downward is unclear from the declining volume alone. In 2022, Nvidia experienced prolonged periods of price stability with shrinking volume at certain stages, as did Boeing during its earnings struggles. The waiting process is painful, but once the breakout direction is confirmed, the move can be very strong.

Trading insight: Be patient during price stability with shrinking volume; avoid blind trading in no-direction scenarios. The key is to watch for a sudden surge in volume, which signals a real move.

3. Volume surges downward: market panic

This is the most dangerous yet most straightforward signal—price plunges sharply while volume increases dramatically. What does this mean? The market is collectively fleeing.

During the COVID-19 outbreak in 2020, hotel stocks like Hilton experienced a brutal volume spike and price collapse, with shares halving in days and volume hitting record highs. Investors panicked and sold off en masse, with every minute seeing someone cutting losses. This is a true reflection of a volume surge downward.

But there’s an opposite opportunity to note: Sometimes, a volume spike downward can be a bottoming signal. For example, Estée Lauder’s stock plummeted in September 2023 after missing earnings expectations, with volume soaring. Such panic often overreacts to bad news, and the stock subsequently rebounded significantly, offering a profit opportunity for contrarians.

Trading insight: Avoid risk during a volume spike downward immediately, but also distinguish whether it’s a trend reversal or excessive panic. Novices should steer clear; experienced investors can look for opportunities.

4. Volume shrinks during decline: slow and exhausted

The stock price declines, but trading volume diminishes. This indicates that the decline is not driven by strong participants. Buyers are scarce, and sellers are not rushing to unload, showing a state of market apathy—“I give up.”

This situation often results from low participation rather than active selling. In 2018, Netflix’s stock kept falling after subscriber growth slowed, with multiple episodes of volume shrinking during the decline. Similarly, in 2022, Facebook (Meta) experienced a prolonged downtrend with decreasing volume amid doubts about its Metaverse investments and sluggish growth.

This isn’t necessarily a bad sign; it could be a buildup phase. When the market is too quiet, it often means the bottom is near.

Trading insight: Don’t panic over shrinking volume during a decline; wait for a sudden increase in volume to confirm the trend reversal.

5. Price falls, volume increases: bearish sentiment or bottom fishing?

A decline in price accompanied by increased volume differs from a volume spike downward—it’s less extreme and may reflect two very different market sentiments.

One possibility is: the market is bearish, with more people selling, and the downtrend may continue. Another is: smart bottom-fishing funds have started to buy, and the selling wave is about to end.

In late 2018, Apple’s stock plunged due to declining iPhone sales and trade tensions, with volume increasing as the price fell sharply—reflecting bearish sentiment. Conversely, Blackberry in 2012 experienced a long decline with gradually increasing volume, which actually indicated that bottom-funding was quietly entering, and the stock eventually rebounded.

Trading insight: When price falls with increasing volume, analyze carefully—preferably combine with fundamentals and other technical indicators. Is the downward momentum truly strong, or is the market already pricing in a recovery? This will determine whether to avoid or to seize the opportunity.

Core principles of applying volume-price relationship

• Volume leads price: Changes in volume often precede price movements; many times, volume declines before prices adjust.
• Healthy uptrend involves increasing volume: Genuine strong upward trends should be accompanied by gradually rising volume; rising with shrinking volume is often a trap.
• Use as a reference, not alone: The volume-price relationship is a signal for reference; it must be combined with technical indicators, fundamental analysis, and market environment to make reliable decisions.

The volume-price relationship may seem simple, but it fundamentally reflects the collective psychology of market participants. Mastering it allows you to hear the true voice of the market amid the noise.