The essential internal and external volume in the stock market! Understand the meaning of internal and external volume to instantly grasp buying and selling momentum.

The most commonly heard term in short-term trading is “internal and external volume,” but what exactly does this mean? Simply put, internal and external volume is an indicator used to see who is more eager to trade in the market. Understanding the meaning of internal and external volume can help you judge the short-term trend of stock prices.

First, understand “active buying” and “active selling”

In stock trading, there are two types of order placements: bid price (buyer’s offer) and ask price (seller’s asking price). When a transaction occurs, it’s important to see who is more proactive in pushing the trade.

Transaction at bid price = internal volume: Sellers are willing to accept lower prices to sell quickly, indicating they are more eager.

Transaction at ask price = external volume: Buyers are willing to pay higher prices to buy quickly, indicating they are more eager.

For example, TSMC’s quote shows a bid of 1160 yuan/1415 shares and an ask of 1165 yuan/281 shares. If an investor sells 50 shares immediately at 1160 yuan, this counts as internal volume (sellers actively accommodating buyers); if someone buys 30 shares immediately at 1165 yuan, this counts as external volume (buyers actively accommodating sellers).

What is the five-level quote?

Open your brokerage app, and the most prominent display is the five-level quote. The green on the left shows buy five levels (the top 5 buy orders), and the red on the right shows sell five levels (the lowest 5 sell orders). The first row’s bid and ask represent the highest and lowest current market prices.

Note that the five-level quote only shows order book information and does not necessarily reflect actual trades, as orders can be canceled at any time.

The key is the internal and external volume ratio

Internal and external volume ratio = internal volume ÷ external volume

This ratio tells you about the relative buying and selling strength in the market:

Ratio > 1: Internal volume is larger, indicating sellers are more eager, which is a bearish signal, with higher risk of price decline.

Ratio < 1: External volume is larger, indicating buyers are more proactive, which is a bullish signal, with higher potential for price increase.

Ratio = 1: The buying and selling forces are balanced, and the market is in a stalemate, with no clear direction.

How to apply the internal and external volume ratio in practice?

Just looking at the ratio isn’t enough; you need to combine it with price, volume, and order book structure for comprehensive analysis:

External volume > Internal volume + price rising: Buyers are actively pushing prices higher, a healthy bullish signal. If volume increases, short-term upward momentum is strong.

Internal volume > External volume + price falling: Sellers are actively unloading, a healthy bearish signal. If volume increases simultaneously, downward pressure is strong.

Beware of “false signals”: External volume exceeds internal volume but price does not rise or even falls, and volume fluctuates wildly. This may be a manipulation by big players placing sell orders to lure retail investors in while secretly selling off; the opposite can also happen.

Trading logic for support and resistance zones

Using internal and external volume ratio together with support zones and resistance zones yields better results.

Support zone: When the price drops to a certain level and stops falling, it indicates large buy orders are willing to absorb the sell-off, expecting a rebound.

Resistance zone: Despite strong buying interest, the price is stuck at a certain level, often because previous high-position holders are trying to unload at a loss, creating heavy selling pressure.

The practical strategy is simple: go long at support zones and short at resistance zones. Once the stock effectively breaks below support or above resistance, it often forms a one-sided trend until it encounters a new support or resistance level.

Strengths and weaknesses of internal and external volume

Advantages: Real-time data, conceptually simple, effective when combined with order book analysis.

Disadvantages: Easily manipulated by big players (placing, executing, and canceling orders to create false signals), only reflects short-term behavior, can be distorted if used alone.

Final reminder

Internal and external volume ratio is just one of many technical analysis tools and should not be used as the sole decision criterion. True investment decisions also need to consider volume, fundamentals, overall economic environment, and other factors. Remember, to improve your trading success rate, you must develop comprehensive skills in market analysis and risk management.