Price-volume correlation

Price-volume correlation is an important concept in technical analysis (TA) that examines the relationship between price movements and trading volume. It helps investors to understand the strength and validity of price trends and can provide insights into market dynamics.

Definition: Price-volume correlation refers to the degree to which changes in price are accompanied by changes in trading volume. It examines whether there is a consistent relationship between price movements and the corresponding volume of shares, contracts or instrument traded.

Confirmation of Trends: In technical analysis (TA), the principle of 'confirmation' is often used which suggests that price movements should be supported by increasing volume during uptrends or decreasing volume during downtrends. This suggests that a trend is more likely to be valid and sustainable if it is accompanied by an appropriate volume pattern.

• Upward Price Movement with Increasing Volume: It indicates a stronger bullish sentiment and suggesting that more market participants are actively buying the security when prices rise along with an increase in trading volume. This scenario supports the validity of the uptrend. If both price and volume is reverse then it may be a fake move.
• Downward Price Movement with Decreasing Volume: Conversely, it suggests a weaker bearish sentiment and a lack of selling pressure when prices decline while trading volume decreases. This pattern can indicate a potential exhaustion of the downtrend or a consolidation phase.

Divergence: Divergence between price and volume can provide valuable insights as well.

• Bullish Divergence: Bullish divergence occurs when prices are in a downtrend and making lower lows but the volume is decreasing. This can be a sign of selling exhaustion and a potential reversal or a trend change to the upside.
• Bearish Divergence: Bearish divergence occurs when prices are in an uptrend and making higher highs but the volume is diminishing. This can suggest weakening buying pressure and a potential reversal or a trend change to the downside.

Volume Confirmation: Volume can also confirm breakout or breakdown moves. When prices break through important support or resistance levels with significantly higher-than-average volume then it suggests a higher probability of a valid breakout or breakdown. Conversely, if a breakout or breakdown occurs with low volume then it may indicate a false move or lack of conviction in the market.

Considerations: It is important to note that it is not infallible and should be used in conjunction with other technical analysis tools while price-volume correlation can be a useful tool in TA. Market conditions and specific factors affecting a security can influence the significance of price-volume patterns.

Overall, price-volume correlation helps analysts to assess the strength and reliability of price trends and provides insights into market sentiment and dynamics. By examining the relationship between price and volume, investors can make more informed trading decisions and potentially identify potential reversals or trend changes.