The relationship between price and volume determines trading success rate: master 5 signals to identify the best entry points

In stock trading, looking at price movements alone is far from enough. Many investors overlook a key factor — the correlation between trading volume and price trend. When we can accurately interpret volume-price signals, we gain greater confidence in distinguishing true trends from false ones, thereby identifying the best trading opportunities.

Why is the volume-price relationship so important?

The essence of the volume-price relationship reflects the true intentions of market participants. Trading volume indicates how many are buying and selling, while price is the result of these transactions. Combining these two analyses allows us to see through the market’s real direction.

For example, if the stock price continues to rise but trading volume does not support it, it often indicates that buying momentum is waning. Conversely, if the stock price drops sharply with a surge in volume, it may suggest panic selling by investors, potentially setting the stage for a rebound.

Below are 5 common volume-price combinations and their market implications:

Signal 1: Price Rising, Volume Shrinking — a false rally warning

When prices rise, most investors feel optimistic. But if you notice trading volume decreasing during this process, you should be alert.

Price rising with shrinking volume often indicates diminishing market approval of the rally. Fewer new buyers are entering, and previous buyers are becoming cautious. This pattern has repeatedly signaled turning points in historical cases.

For example, Alibaba experienced a period of new highs with gradually declining volume, followed by a price correction. Similarly, Tesla showed rising prices but decreasing volume — an important short-term top indicator.

Trading tip: When you observe a pattern of rising prices with shrinking volume, consider reducing your holdings or setting stop-loss orders. This is not a bearish signal but a warning that upward momentum may lack sufficient strength to continue.

Signal 2: Price Flat, Volume Shrinking — accumulation or weakness?

Stocks oscillate within a narrow range, but trading volume keeps decreasing. This “sideways volume contraction” often occurs during consolidation phases.

Market participants are hesitant. Some expect continued gains, others foresee declines, and most choose to wait. The shrinking volume directly reflects this psychological state.

Companies like NVIDIA and Boeing have experienced such sideways movements, with prices repeatedly testing support levels and volume decreasing accordingly. Eventually, these periods lead to either an upward breakout or a downward breakdown, but before the breakout, the market often remains in this dull sideways pattern.

Trading tip: The best strategy during flat prices with shrinking volume is to wait. Avoid entering trades based on short-term fluctuations within the range. Take action only when volume suddenly expands, confirming a breakout direction. Volume is the key confirmation signal.

Signal 3: Explosive Volume Drop — danger and opportunity coexist

In a short period, the stock price plunges sharply while volume surges. This is one of the most panic-inducing volume-price combinations.

Explosive volume decline usually reflects extreme pessimism in market sentiment. A large number of investors are fleeing simultaneously, with buy orders overwhelmed by sell-offs. During the COVID-19 outbreak in early 2020, tourism-related stocks like Hilton experienced such crashes. Fear of the pandemic led to massive stop-loss selling, causing steep short-term losses.

Interestingly, explosive volume declines can also be the most valuable buying opportunities. When Estée Lauder’s Q3 earnings disappointed in 2023, the stock price fell sharply with high volume, amplifying fears. Later, the stock rebounded, and early buyers reaped significant gains.

Trading tip: Do not blindly short or buy during explosive volume declines. First, observe whether the stock is experiencing high-volume declines at the top (indicating genuine weakness) or at the bottom (potential buying opportunity). Combining fundamental analysis helps determine whether it’s a risk or an opportunity.

Signal 4: Falling Price, Volume Shrinking — calm in decline

The stock price declines, but trading volume decreases as well. This seeming contradiction actually indicates a special market state.

Falling prices with shrinking volume suggest selling pressure is easing, but buying interest is also absent. The market lacks direction, and investor sentiment remains relatively calm. Netflix showed this pattern during some downturns, with slow declines and no panic selling. Facebook’s prolonged struggles in summer 2022 also exhibited this volume contraction — no rebound, no collapse.

This pattern usually means the market is waiting — for new catalysts, more information, or for participants to reassess the asset.

Trading tip: During declining volume, be patient and observant. Watch for signs of volume increasing again (indicating active accumulation) or a breakout with expanding volume. A simple volume contraction often signals a temporary pause.

Signal 5: Price Falling, Volume Increasing — a turning point of decline

The stock price drops while trading volume rises. This signal is highly confusing because it can indicate two very different outcomes.

On one hand, it may mean more investors are panicking and selling, suggesting the downtrend will continue. On the other hand, it could indicate that bottom-fishers are actively absorbing the sell-off, and a rebound is imminent.

At the end of 2018, Apple’s stock plunged due to weak iPhone sales and trade tensions, with volume increasing steadily. That period was risky but also marked the start of a rebound. Similarly, Blackberry’s 2012 decline, driven by smartphone market shifts, saw rising volume as the stock price fell, eventually attracting value investors at low levels, leading to a rebound.

Trading tip: The logic during falling prices with increasing volume is complex. It’s essential to combine fundamental analysis, technical positioning (e.g., at a historical low), and the identity of sellers (institutions vs. retail). If value stocks are falling with rising volume at low prices, it may be a buying opportunity. For trend stocks in decline, exercise caution.

How to apply volume-price relationships in trading?

Step 1: Identify the current volume-price pattern. Observe recent weeks’ price movements and volume changes to determine which of the five patterns it resembles.

Step 2: Combine with technical positioning. A rising price with shrinking volume at a high level signals risk; a sharp drop with explosive volume at a low level may be an opportunity. The same pattern can have different implications depending on position.

Step 3: Wait for volume confirmation. Avoid trading when signals are ambiguous. Wait for volume to expand or for a clear breakout in a specific direction before entering.

Summary

The volume-price relationship is a way for investors to communicate with the market. Price is the outcome; volume is the process. When you can interpret both simultaneously, you hold the key to predicting market reversals.

Remember, no single indicator is perfect. Volume-price analysis should be combined with other technical tools, fundamental analysis, and risk management strategies. But undoubtedly, investors who ignore volume are often caught off guard during market turns. Next time you observe a stock’s movement, look at the price first, then volume, and finally make a comprehensive judgment — this habit will significantly improve your trading success rate.