Finding Buying Points Through Price and Volume Fluctuations: Why Price Decline with Decreasing Volume Is the Best Entry Signal

Core Logic of the Price-Volume Relationship

In the world of stock technical analysis, the price-volume relationship is an important indicator for assessing market confidence. Simply put, there is a subtle correlation between stock prices and trading volume — when market participants are interested in a certain direction, trading volume tends to increase; when the market is in a wait-and-see mode, volume diminishes. This interaction can help investors predict future market trends and is an essential part of technical analysis that should not be overlooked.

Five Common Price-Volume Signals

Warning Signal (Be Cautious)

Price rises with decreasing volume indicates that stock prices are climbing but trading volume is gradually shrinking. This may seem contradictory, but it actually reveals market apathy — buyers are losing interest, and upward momentum lacks sufficient energy. In early 2017, Tesla and Alibaba experienced this phenomenon, ultimately leading to weak price gains.

Volume spike during a decline is another extremely dangerous signal. When stock prices fall rapidly accompanied by a surge in volume, it indicates panic selling. During the COVID-19 pandemic in 2020, hotel stocks like Hilton experienced such sharp declines. Interestingly, this extreme pessimism can sometimes create bottom-fishing opportunities — for example, Estée Lauder reported disappointing earnings and plummeted, only to rebound strongly afterward.

Price stabilizes with decreasing volume suggests that the stock is oscillating within a certain range, with trading volume continuously declining. Nvidia and Boeing have both experienced long periods of sideways movement with light trading, indicating market confusion.

Key Buying Point Signal: Price declines with decreasing volume

The most easily overlooked but potentially most powerful signal is when the price falls with decreasing volume. Many investors panic when they see prices drop, but they may not realize that this could be the best entry point. When a price declines accompanied by shrinking volume, it indicates that the sell-off is not panic-driven but a rational exit. This is often when buying opportunities emerge.

Netflix in 2018 is a typical example — the stock gradually declined while volume kept shrinking, reflecting that investors were not panicking but waiting on the sidelines. Similarly, Facebook in summer 2022 experienced this, with trading volume gradually declining during price adjustments, followed by a bottoming and rebound.

Reversal Signal: Price declines with increasing volume

Price declines with increasing volume indicates that trading volume is rising as prices fall, which often signals a potential turning point. Although seemingly negative, it can actually hide buying opportunities. Apple in late 2018 experienced a sharp drop due to slowing iPhone sales, but volume surged significantly, eventually leading to a reversal and price increase. The case of Blackberry is even more obvious — as the stock price kept falling, investors realized the valuation was overly low, and many started buying in, ultimately triggering a bottoming rebound.

How to Use the Price-Volume Relationship for Smarter Decisions

Practical Tips for Investors

Understanding the price-volume relationship is just the first step. Investors should not rely solely on one indicator but should combine it with other technical indicators and fundamental analysis for comprehensive judgment. When the buy signal of price declines with decreasing volume appears, it’s crucial to verify carefully to confirm that it truly represents a market bottom, rather than over-interpretation.

Mastering these price-volume principles helps investors more accurately identify market turning points and develop more robust trading strategies. In volatile markets, the price-volume relationship acts like a mirror, reflecting the true thoughts of market participants.