Have you ever experienced this kind of dilemma: the stock you hold is still rising, but the trading volume is shrinking day by day, making you feel both happy and uneasy, not knowing whether to keep holding or take profits first. Or conversely, seeing the stock price hit a new high with a surge in volume, excitedly jumping in, only to find you've bought at the top. In fact, these troubling phenomena all point to the same thing—the relationship between volume and price.

Recently, while organizing my trading notes, I truly realized the importance of the volume-price relationship in judging market trends. The rise and fall of stocks seem to be about price movement on the surface, but what really determines how far this trend can go is the trading volume behind it. Today, I want to share my understanding, hoping to help you avoid some detours.

The volume-price relationship, simply put, is the interaction between a stock's price and its trading volume. Whether the stock is rising or falling, the size of the trading volume reflects the market participants' level of agreement with this trend. Observing how volume and price coordinate can help us predict the next move and improve our trading success rate.

I’ve compiled a table of the 8 common volume-price relationships for quick reference. The most common is increasing volume with rising price, usually appearing at the early or middle stages of an uptrend, indicating capital inflow and bullish momentum, making it a good time to buy. Conversely, decreasing volume with falling price, if it occurs during a decline, suggests no one dares to buy, and the downtrend isn’t over yet. But if it happens at the end of a decline, with prices falling and volume shrinking to the extreme, it indicates selling pressure has exhausted, and the bottom may be near.

There’s also a special case called “heavenly volume and heavenly price,” which is when the stock hits a new high with record-breaking volume. This usually signals that the main players are offloading shares to retail investors at the peak of popularity, a precursor to reversal. Conversely, “earthly volume and earthly price” appears at long-term bottoms, where trading volume shrinks to the point of no return, the market is frozen, and it’s often a zone for medium- to long-term positioning.

Another situation is volume increase with flat price. At the bottom, it indicates the main players are quietly accumulating, buying while suppressing the price. At high levels, it often means the main players are offloading shares, creating a false appearance of active trading to attract retail investors. When volume and price are both stable, it’s the simplest—indicating a balance between bulls and bears, and when the trend is unclear, it’s best to watch more and trade less.

But the most critical thing to watch out for is divergence between volume and price. Under normal circumstances, volume and price should move together—price rises with increasing volume, and decreases with shrinking volume. When divergence occurs, it usually signals weakening momentum or a false trend, often an important warning sign of a potential reversal.

For example, volume increase during a price decline is a classic divergence. If it appears early in a downtrend, it indicates panic selling, with everyone rushing to exit, and the decline is just beginning. But if it appears at the end of a decline, after prices have already fallen significantly, a sudden surge in volume is often seen as the last capitulation, suggesting the bottom is near.

Another divergence is volume shrinking while price rises. When this occurs at the end of an uptrend, prices are still making new highs but trading volume is decreasing wave after wave, indicating no one is willing to chase prices anymore—only existing holders are supporting the rally. This situation often appears at the peak of a wave, warning of a possible M-top or head-and-shoulders reversal. If a rebound occurs during a downtrend with no volume, it’s a “panic bounce,” which usually ends with further declines.

After understanding these volume-price relationships, you’ll realize that many confusing market movements can actually be deciphered through the interaction of volume and price. Volume is the momentum of price movement, and price reflects volume. When they align, the trend is more reliable; divergence should raise your alertness.

However, these are not foolproof prediction tools, but rather aids to interpret the market and improve success rates. The same increase in volume with falling price can mean very different things depending on whether it’s early or late in a decline—judging the current position of the stock is key. For example, volume decrease during a decline needs careful analysis—are you in the middle of a decline or near the end? Your response strategy will differ accordingly.

Next time you analyze the market, take a few extra seconds to observe changes in trading volume. When you get used to viewing volume and price together, you’ll be closer to understanding the true state of the market than those investors who only watch price movements.