Why a drop in volume is bound to rebound? Uncovering the trading logic behind the stock market

In the stock market, declining volume is often a heavy weight on the minds of investors, but there is a view that declining volume may signal an impending market rebound. In this article, we will delve into why a volume drop may be bound for a rebound, uncover the trading logic behind the stock market, and help investors better understand this phenomenon.

Definition of Discharge Down

  1. What is a downward volume release?
    A declining stock on volume is a stock with a relatively large volume in the process of falling price. On a K chart, the volume bar below a falling candlestick is usually higher, indicating a large amount of selling power in the market.
  2. Characteristics of Declining Volume
    Significant increase in volume: The main feature of a downtrend on volume is the relatively large volume, indicating that investors are reacting more strongly to the downtrend.

Large short-side forces: A falling volume usually indicates that short-side forces prevail, market sentiment is pessimistic, and investors are generally inclined to sell stocks.

Why does a falling volume trigger a rally?

  1. Panic selling
    Declining volume is often associated with panic selling. Investors may be affected by negative news or events in the market, leading to sharp mood swings and massive selling. At such times, the market sentiment may be overly pessimistic, causing the stock price to fall more than its actual value.
  2. Gradual depletion of selling power
    Selling power may be gradually depleted during the process of a volume drop. The initial sell-off may be driven by sentiment rather than real fundamental changes. Once the selling power is gradually weakened, the market may rebound.
  3. Market maker control
    Volume drop often triggered the attention of the dealer. The dealer may take the opportunity to absorb the selling of retail investors and gradually control the stock price. When the dealer thinks the price is right, it may trigger a rally through a large buy order, pushing the stock price up.
  4. Technical support level appears
    In technical analysis, a support level is a key price level at which the stock price may rebound. After a drop in volume, if the stock price touches a technical support level, it may trigger a wave of buying, thus pushing the stock price to rebound.

How to determine whether a drop in volume will trigger a rebound?

  1. Pay attention to market sentiment
    Investors can determine whether a falling stock will trigger a rebound by paying attention to market sentiment. If the market sentiment is extremely pessimistic, it may be a good time for a rally.
  2. Volume Change
    Observing the volume changes during a downward trend in volume is also a key factor in determining whether a rebound will occur. If the volume is gradually decreasing in the decline, it may be a sign that a rebound is coming.
  3. Finding Support Levels
    Support level in technical analysis is the key to determine the rebound. If the stock price touches a technical support level after falling on volume, it may be a signal to buy.
  4. How oversold the market is
    A drop in volume may lead to an oversold market, i.e. the stock price has fallen too fast and too hard, and the market may need some time to calm down. In an oversold market, the possibility of a rally is higher.

Risks of a rally triggered by a drop in volume

  1. Likelihood of continued decline
    Although a downtrend on volume can sometimes trigger a rally, it does not necessarily mean that it will happen. The market may still be in a downtrend at times and investors need to be cautious in their judgment.
  2. Limited rebound
    Even if a rebound occurs, its magnitude may be limited. Investors need to be rational, do not expect too much from the rebound and exercise risk control in a timely manner.
  3. Changes in market structure
    After a drop in volume, the market structure may change and the original support and resistance levels may fail. Investors need to pay close attention to the changes in the market and adjust their strategies in time.

How to cope with the release of falling volume?

  1. Cautious of chasing down the market
    Investors should be cautious in chasing down the market in case of a downward trend. Excessive downtrend chasing may lead to losses rather than blindly following market sentiment.
  2. Adjust positions flexibly
    After a drop in volume, investors can consider adjusting their positions flexibly. After the market sentiment stabilizes, gradually build up positions to diversify risks.
  3. Setting stop-loss levels
    Risk control is the key to investment. After the drop in volume, investors need to set a clear stop-loss level to prevent excessive losses.
  4. Focus on overall market risk
    While a drop in volume may trigger a rebound, investors still need to pay attention to the overall risk of the market. Market risks can change at any time and investors need to stay alert.

Whether or not a drop in volume is bound to trigger a rally is a complex issue that depends on the specifics of the market and investors’ judgment of the market. Although a falling volume may create conditions for a rebound, investors need to consider a variety of factors when making decisions and should not blindly follow market sentiment. Cautiously analyzing the market situation, paying attention to market sentiment, and setting clear stop-loss levels are all key points that investors should pay attention to when releasing falling volume. Ultimately, investment decisions should be based on a comprehensive and in-depth understanding of the market for sound investment performance.

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