Declining volume, shrinking volume with rising prices... What do these volume and price signals really mean? A must-read guide for traders

In Crypto and stock market trading, many people focus on price but overlook trading volume. But experts all know a secret: Price is just surface, trading volume reveals the truth. Today, let’s discuss those easily overlooked but powerful volume-price relationships, and how to use them to accurately identify entry and exit points.

Why is trading volume so important?

The volume-price relationship essentially reflects the true attitude of market participants. When trading volume surges or diminishes, it often hides significant shifts in investor behavior.

Simply put:

• High trading volume = market consensus (whether optimistic or pessimistic)
• Low trading volume = market hesitation, lack of certainty
• Divergence between volume and price = trend may be about to reverse

Mastering these three points allows you to sniff out market turning points earlier than most traders.

Detailed explanation of the five volume-price signals

1. Flat price with shrinking volume — Beware of consolidation traps

Stocks or cryptocurrencies oscillate within a narrow price range, while trading volume continues to decline.

In this situation, the market is like entering a sleep state. Investors lose direction, unsure whether to buy or sell. Flat price with shrinking volume is usually a short-term pause, but it could also be the calm before a sharp drop.

Market psychology: Cautious, hesitant sentiment, lack of initiative

In real cases, NVIDIA (NVDA) has shown this during certain sideways phases — price fluctuated within a range, volume decreased week by week, until a catalyst appeared and the market made its move.

Trader’s response: During flat price with shrinking volume, it’s best to stand aside and wait for a clear increase in volume before re-entering.

2. Rising price with shrinking volume — False bullish signal

Price keeps hitting new highs, but trading volume gradually declines. Sounds contradictory, right?

But that’s the problem. A rise without volume support is often a sign of weakness.

This phenomenon tells us: buyers’ momentum is waning. It could be retail chasing the trend or institutional funds quietly exiting. When volume hits a minimum, a reversal is often near.

Market psychology: Participants gradually lose interest, upward momentum weakens

Tesla in early 2017 experienced a similar pattern — stock price rose, but few were truly buying. When market sentiment cooled, this weak rally suddenly collapsed.

Trader’s response: When you see rising price with shrinking volume, don’t chase blindly. Consider gradually reducing positions or setting stop-losses.

3. Falling price with increasing volume — The most dangerous signal

This is the most alert-worthy among the five signals. Price declines while volume surges significantly.

What does this mean? Panic selling. Large-scale fear-driven sell-offs.

Falling price with increasing volume falls into two scenarios:

Scenario A: Trend continuation decline
Price keeps falling, volume keeps rising, reflecting deep pessimism. The market crash in early 2020 due to COVID-19 is a classic example — travel-related stocks like Hilton (HLT) saw prices drop while volume soared, worried about the pandemic’s impact.

Scenario B: Opportunity in decline
Sometimes, falling price with increasing volume is a blessing. For example, Estée Lauder (EL) issued earnings warnings in 2023, causing a sharp drop and volume spike. But subsequent movement showed this excessive sell-off created a great buying opportunity. savvy traders buy the dip here and profit handsomely.

Market psychology: Panic, widespread pessimism, ample liquidity (a double-edged sword)

Trader’s response: When you see volume spike during a decline, don’t rush to sell or buy impulsively. First, judge whether it’s a trend reversal or a technical oversell, then decide whether to avoid or to bottom-fish.

4. Shrinking volume during a decline — Weakness in the downtrend

Price drops, but volume shrinks. This looks much milder than a volume spike during a decline.

In reality, this indicates buyers are completely absent. No one wants to buy, and sellers aren’t in a hurry to sell either. The market is in a stalemate.

Shrinking volume during a decline may signal a temporary pause or the buildup before a deeper correction. But at least it’s less urgent and dangerous than a volume spike.

Market psychology: Cautious, watching, no clear direction, but not panicking

Netflix in some decline phases in 2018 showed this pattern — price gradually fell month by month, but volume kept decreasing.

Trader’s response: During volume-shrinking declines, it’s best not to rush bottom-fishing. Wait for volume signals — either price rises with volume (confirming reversal) or falls with volume (confirming trend).

5. Price decline with increasing volume — Opportunities and risks coexist

Price drops, but volume increases. This is more complex than a volume spike during a decline because it has dual meanings:

Implication A: Trend confirmation
Widespread pessimism, continuous selling. It may indicate a deeper fall.

Implication B: Bottoming signal
Conversely, rising volume during a decline can also mean investors are gradually building positions at the bottom. For example, Apple in late 2018 saw its stock plunge due to weak iPhone sales and US-China trade tensions, with volume surging. But afterward, the stock rebounded, and those who bought in high-volume zones reaped good profits.

Another classic example is BlackBerry (BB). Starting from 2012, as smartphones ate into feature phones, BlackBerry’s stock entered a long decline. But during deep corrections, smart funds quietly accumulated, eventually leading to a bottom and rebound.

Market psychology: Depends on position. At high levels, it’s trend continuation; at low levels, it’s value discovery.

Trader’s response: The key is to judge your position. Use technical indicators (like RSI, Bollinger Bands) to assess if it’s oversold, combined with fundamental analysis to make decisions.

A table to understand the five volume-price relationships

Practical tips: Volume-price relationship is not foolproof

Finally, a important reminder: Volume-price relationships are just part of trading decisions; they shouldn’t be relied on exclusively.

True experts combine volume-price signals with:

• Other technical indicators (moving averages, MACD, RSI, etc.)
• Fundamental data (performance, policies, industry trends)
• Overall market environment (bull or bear market, risk appetite)
• Capital flow indicators (institutional moves, block trades)

By integrating these factors, your market understanding becomes more comprehensive, and your trading decisions more mature. Volume-price relationships can help you spot anomalies early, but real profits come from thoughtful execution.

Now that you’ve grasped the five volume-price signals, the next step is to practice identifying them in real trading. Every observation builds experience, and eventually, you’ll read the market as easily as reading a book, understanding the stories it tells through volume and price.