The relationship between price and volume determines the trading opportunity: Master these 5 typical trend patterns

In the world of stock technical analysis, the relationship between volume and price is a key indicator for predicting future market trends. The so-called volume-price relationship refers to the intrinsic connection between stock price movements and corresponding trading volume. Simply put, when stock prices fluctuate, changes in volume often reveal the underlying market psychology—are institutions heavily accumulating, or are retail investors panic-selling?

Why is the volume-price relationship so important?

Stock trading is essentially a psychological game among participants. Price is just an appearance; volume reveals the truth. When prices rise but volume diminishes, it indicates waning upward momentum; when prices fall with surging volume, it may signal the release of extreme emotions. Learning to interpret the volume-price relationship is like mastering the market’s “electrocardiogram.”

Based on different combinations of volume and price changes, we can identify five typical market signals:

Signal 1: Price rises, volume shrinks—hidden danger in the ascent

When stocks suddenly see light trading volume during an upward move, danger may be quietly approaching.

If the price keeps hitting new highs but trading volume isn’t supporting the move, what does that mean? It indicates a decline in market participation. In other words, fewer investors are willing to buy at higher prices, and the upward momentum is gradually weakening. This scenario of rising price with declining volume often occurs in:

Technical rebound traps: The price quickly bounces from the bottom, attracting some attention, but as the rise extends, new buyers hesitate to follow. When volume decreases while price rises, it’s like climbing a mountain with rapidly diminishing energy— a sign of exhaustion.

Institutional stealth selling: Large players have already accumulated positions and are now gradually reducing holdings as the stock price rises, creating a false appearance of strength. Since this is stealth selling rather than active accumulation, volume tends to decline.

Many popular stocks have exhibited this pattern. For example, in early 2017, a tech giant’s stock price rose steadily over three months, yet trading volume decreased by nearly 40% compared to the previous quarter. Subsequently, the stock experienced a clear correction.

Investor response: When you see rising prices with shrinking volume, avoid blindly chasing the rally. The correct approach is either to wait for volume to pick up to confirm the trend or to reduce holdings to avoid being caught in a trap.

Signal 2: Price stable, volume shrinks—waiting in consolidation

Stock price oscillates within a narrow range while trading activity gradually diminishes, representing a typical volume-price consolidation.

This pattern usually appears during pauses in an uptrend or downtrend. Market participants are caught in collective “hesitation”—bulls worry about getting caught at high levels, bears are reluctant to short aggressively. As a result, everyone is watching, and trading activity drops significantly.

What does volume-price stability imply? It indicates that the direction is still uncertain. The stock may be accumulating energy for the next move upward or preparing for a larger decline. This phase is the hardest to interpret.

Some high-quality stocks have experienced prolonged consolidation with low volume. For instance, a semiconductor leader in 2020-2021 traded sideways for nearly six months, with daily volume decreasing from millions to hundreds of thousands. Investors were generally confused about whether to add positions or wait.

Investor response: Volume-price stability is a “pending” signal. It’s best to wait for volume to change and confirm the next direction rather than actively betting. Usually, a sudden increase in volume will lead to a breakout or breakdown.

Signal 3: Explosive volume decline—extreme market fear

When stock prices plummet sharply in a short period while volume surges to record highs, it reflects extreme market panic.

Explosive volume decline often signifies a major negative event impact. Investors no longer care about costs; they just want to exit quickly. Volume can break past months or even years of records, as many trapped and active sellers rush for the exits.

This pattern is the most dangerous because it often involves irrational selling. Panic spreads, and the more people see prices falling, the more they sell, creating a vicious cycle. But danger also breeds opportunity.

In early 2020, the COVID-19 pandemic triggered a market crash. Many traditional consumer stocks experienced massive declines with record volume. For example, a well-known hotel chain’s stock fell over 50% in a week, with volume increasing tenfold. The market was filled with a sense of doom—believing the travel industry was doomed.

However, careful analysis shows this was an overreaction. Savvy investors bought heavily during this panic, reaping multiples in subsequent recoveries.

Another example is a 2023 biotech company’s stock plunging 30% in a week after earnings missed estimates, with volume hitting new highs. Many investors panicked and sold. But from a longer-term perspective, the company’s fundamentals remained intact; it was just a short-term correction. Bottom-fishers who bought then saw significant rebounds.

Investor response: During explosive declines, remain calm and discerning. Determine whether it’s short-term panic or long-term decline. If high-quality companies are falling due to panic, it may be a rare buying opportunity. If fundamentals are deteriorating, even cheap prices shouldn’t tempt you.

Signal 4: Volume shrinks, price declines—weak downward momentum

Stock price is falling, but volume is decreasing, indicating a lack of selling pressure.

Contrary to explosive declines, low-volume declines often reflect a “cold” market. No one is actively buying or selling. The stock behaves like a deflated balloon slowly sinking.

This pattern typically appears in two situations: first, after a substantial decline, buyers gradually step in, causing volume to decrease; second, the overall market lacks trading vitality, and few are interested in the stock.

In 2018, a well-known media platform’s stock experienced a prolonged volume-shrinking decline. The price slid from highs month by month, but daily volume kept decreasing. This indicated investors had lost interest, and the market was “voting with their feet.”

A key feature of volume-shrinking declines is that when the trend reverses, rebounds can come suddenly. Because buying power is building up, and with low volume, a small surge can push prices sharply higher.

Investor response: Although seemingly “gentle,” volume-shrinking declines are often overlooked. Investors tend to adopt a “wait and see” attitude, missing early entry opportunities. The correct approach is to monitor volume; when signs of stabilization appear, it’s a good time to buy.

Signal 5: Price declines, volume increases—preparing for a transition

Stock price is falling, but trading volume is rising, often signaling an impending trend reversal.

Volume increase during a decline has two meanings. One, it may indicate that selling isn’t over yet, and panic is still spreading. Two, it could mean that smart money is gradually absorbing heavily sold shares, forming a bottom.

The key to distinguishing between these is observing the magnitude and speed of the decline. If the price drops sharply with explosive volume, it’s the earlier “explosive volume decline”—a danger signal. But if the decline is moderate and volume gradually increases, it often indicates a bottom formation.

At the end of 2018, a tech giant’s stock fell due to slowing sales and trade tensions. During the decline, volume kept increasing. Initially, market sentiment was very bearish, but as the stock corrected deeply, more value investors entered. Over the next 1-2 years, the stock doubled.

Another classic case is a 2012 traditional mobile phone manufacturer’s stock. As smartphone adoption grew, its market share shrank, and the stock declined long-term. During this decline, volume increased, indicating investors were accumulating in anticipation of a turnaround. Although the company didn’t fully revive, the stock bottomed out and rebounded several times.

Investor response: When volume increases during a decline, first determine whether it’s genuine or false. If volume rises but the decline accelerates, selling isn’t over. If volume increases but the decline slows or stabilizes, it’s a true bottom—an opportunity to buy on dips.

The key step: Combine technical indicators with fundamentals

Relying solely on volume-price analysis isn’t enough. The smartest investors combine volume-price insights with the following three dimensions:

Technical analysis: Use moving averages, MACD, RSI, and other indicators to confirm the reliability of volume-price signals. For example, when seeing rising prices with shrinking volume, if MACD shows bearish divergence, the sell signal becomes clearer.

Fundamentals: Understand the company’s actual operational status, industry outlook, and competitive position. After explosive volume declines, assess whether the company’s fundamentals have truly deteriorated or if it’s just short-term negative news.

Market sentiment: Pay attention to overall market risk appetite. In bear markets, even with volume-price divergence, the trend may continue downward; in bull markets, temporary consolidation may be just that.

Summary: Build your trading system around volume-price relationships

Volume-price relationship is a window into market psychology. From rising prices with shrinking volume to explosive declines, from low-volume drops to volume increases signaling bottoms, each pattern tells a story about market participants’ emotions.

• When you see price rising with shrinking volume, be cautious of exhaustion.
• When you see price stable with volume shrinking, wait for a breakout.
• When you see explosive volume declines, distinguish between panic and long-term decline.
• When you see volume shrinking during a decline, it often signals a potential rebound.
• When you see price falling with increasing volume, assess whether a bottom is forming or selling is incomplete.

True trading masters are those who can quickly identify these signals and combine them with other analysis tools and market context to make swift decisions. Incorporate volume-price relationships into your trading system, and you will hold half the secret to market prediction. The other half depends on your patience and discipline.