Common rules of price-volume relationship in the market:
🟨The volume shrinks and the price keeps rising: When the trading volume decreases, the differences are small and the market tends to continue to rise in consensus.
🟨Large volume decline, but not deep: Although panic selling brings about declines, the market tends to recover quickly due to increasing divergence.
🟨The volume rises, but the rise is not high: the divergence is too large, and the market's upward trend is difficult to last long.
🟨Declining with shrinking volume and no bottom in sight: The decline without disagreement may continue for a while until a "mutation" occurs.
The essence of trading volume: Divergence is the driving force of trading
First, we need to understand a concept: Trading volume = Market divergence.
Increased trading volume means that the opinions of buyers and sellers are increasingly divergent, with many willing to sell while many are also willing to buy. Conversely, decreased trading volume indicates strong market consensus and reduced divergence.
In other words: Without divergence, there are no transactions. The fluctuations in the market are essentially a 'game of divergence and consensus.' This is why analyzing changes in trading volume can help us predict the market's next direction.
1️⃣ Below are four typical price and volume phenomena:
1/ Price and volume both rise: The market rises amidst divergence
When the price rises, trading volume also continues to increase, indicating that the market is progressing in a 'tug of war.'
Interpretation: Although the upward momentum is strong, this is a 'consumptive rise.' Once trading volume cannot continue to increase, the upward trend may come to a halt.
Operational advice: When trading volume begins to shrink, be wary that the trend may reverse.
2/ Price increase + Volume reduction: The market rises in consensus
The price is rising, but trading volume remains stable or even shrinks, indicating that market divergence is small, and the trend is stable.
Interpretation: This kind of rise is 'low consumption type' and can often last a long time.
Operational advice: Follow the trend in your positions; unless there are significant volume reversal signals, do not exit easily.
3/ Price drop with increased volume: The market declines amidst divergence
As the price falls, the trading volume significantly increases, indicating a sharp divergence in market sentiment and rising panic.
Interpretation: This is a 'consumptive decline' which is usually difficult to sustain. Once trading volume shrinks and is accompanied by a price rebound, it may indicate that the decline is nearing its end.
Operational advice: Stay calm and patiently wait for a signal of volume rebound.
4/ Decline + Volume reduction: The market declines in consensus
The price is falling, but trading volume is gradually decreasing, indicating that the market generally agrees that prices will continue to decline.
Interpretation: This is a 'low consumption type'; the downward trend may continue for a long time until a mutation occurs (large volume increases).
Operational advice: Don't rush to catch the bottom; patiently wait for a significant change in market sentiment.
2️⃣ 'Mutation' signal: High trading volume is the market's alarm bell
What is a mutation? When a trend has been running for a long time, and one day's trading volume suddenly increases significantly, regardless of whether the price rises or falls that day, it indicates that the market has undergone important changes.
Volume increase: This may be a breakout signal, but it could also be a false breakout, requiring observation of subsequent trends for stability.
Volume increase during a decline: This may signal the emergence of a temporary low point, but further deterioration of market sentiment must still be guarded against.
How to utilize mutations? Continuously increasing trading volume can be used to calculate the market's average cost line, providing important reference for determining whether a trend can continue.
3️⃣ How to use 'price and volume relationship' in investing?
Watch for volume reduction during rises and volume increase during corrections: Low consumption rises tend to last longer, while large sell-offs may indicate that the bottom is not far away.
Pay attention to the 'mutation' signal: Dramatic changes in trading volume are often a precursor to a change in market direction.
Respect market sentiment: Trading volume is a direct reflection of the market's bullish and bearish forces. Learning to understand the relationship between volume and price will help you capture trading opportunities more accurately.
4️⃣Volume and price relationship in bull and bear markets
The volume and price relationship in bull and bear markets shows distinctly different performances, and these characteristics can provide key clues for investors to determine the market stage.
🟨Volume and price performance in a bull market
Bottom starting stage:
When the price just starts to rise from the bottom, the long process of bottoming continues. At this time, many holders remain pessimistic about the future due to the shadow of the previous bear market. However, some foresighted funds have already sensed the opportunity and begin to accumulate positions, resulting in market divergence. This divergence is reflected in trading volume, which gradually increases, often showing as an increase in volume during a sideways trend or a slight rise.
Upward trend phase:
As the price enters a clear upward trend, the investor camp becomes increasingly divided. On one hand, some begin to profit and are eager to cash out; on the other hand, some investors cut losses and leave the market, resulting in both selling pressure and buying support, with divergence becoming more pronounced. During this process, trading volume continues to increase, showing a trend of rising volume.
Top stage:
When the price approaches the top, the controversy between bulls and bears reaches a fever pitch. At this time, trading volume surges, yet the price struggles to rise. This is due to the spread of panic among holders, who indiscriminately sell valuable coins, willing to sell to anyone who will take them. Even if buyers are fully supportive, it is difficult to push the price upward. It usually shows as an increase in volume with stagnation or an increase in volume with a drop.
🟨Volume and price performance in a bear market
Initial stage of the downward phase:
As the price starts to decline from the top, many funds that entered at high levels have yet to profit, feeling reluctant and unwilling to sell easily; some investors may have incurred losses but, out of luck, are unwilling to cut losses. This results in a lighter market selling pressure. Meanwhile, subsequent practitioners notice the downward trend and hesitate to enter and take over. This imbalance of supply and demand causes the market to show a state of declining volume.
Downward channel phase:
When the price clearly enters a downward channel, the bear market signal becomes clear, and experienced practitioners firmly hold their positions and wait. The trapped funds above, tortured by the long downward process, lose patience and ultimately despair and cut losses, yet cannot find a buyer, plunging the market into a situation of declining volume and sharp drops. During bear market disasters, the daily scenes of volume-less declines are unforgettable and vividly demonstrate the cruelty of the bear market.
Bearish exhaustion stage:
After a long and significant decline, the cryptocurrency price enters a relatively low price range. At this time, some aggressive left-side practitioners begin to enter the market to gamble, and trapped funds finally see buying power. Initially, the price will drop sharply with increased volume, and as the downward momentum gradually releases, trading volume will gradually shrink, starting a new cycle of volume reduction and bottoming to accumulate strength for the next round of market movement.
Understanding the volume and price relationship at different stages of bull and bear markets helps us better grasp market rhythm and make informed investment decisions.
The cryptocurrency market is a battlefield of divergence and consensus, and trading volume is the 'thermometer' of market sentiment. I hope this article can help you clear the fog and see the essence of market operations!
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