Understanding Stock Inner and Outer Orders: Gaining Insights into Buying and Selling Sentiment from Order Book Data

On the trading software’s chart, besides the ups and downs of stock prices, there is a set of data often overlooked by beginners but crucial—Inner Volume and Outer Volume. Many investors look at these numbers without understanding their meaning, and some even treat them as “magical indicators” for judging the future market direction. In fact, inner volume and outer volume fundamentally reflect the degree of initiative of buyers and sellers during transactions. Changes in this power balance often hint at short-term stock price movements.

Inner Volume and Outer Volume: Distinguishing the Active Side in Transactions

To understand the difference between inner volume and outer volume, first grasp the logic of stock transactions. In the trading market, sellers want to sell at the highest possible price, so they set the “Ask Price”; buyers want to buy at the lowest possible price, so they set the “Bid Price.” But the final transaction depends on who is willing to make concessions first.

When the stock price is transacted at the Bid Price, it means the seller has decided to break the deadlock actively, selling shares at the buyer’s bid price. This transaction is counted as Inner Volume. What does this indicate? Sellers are somewhat anxious and unwilling to wait, preferring to sell even at a slightly lower price. From market sentiment, this is a bearish signal.

Conversely, when the stock price is transacted at the Ask Price, it means buyers are actively raising their bids to chase the sellers’ offers. This transaction is recorded as Outer Volume. It indicates buyers are eager to enter the market, willing to pay higher costs for quick acquisition, showing a bullish market tendency.

Let’s look at an actual example. Suppose TSMC’s five-level quotes show a Bid at 1160 yuan (1415 lots) and an Ask at 1165 yuan (281 lots). If an investor wants to sell immediately at 1160 yuan and places a sell order that executes 50 lots, these 50 lots are added to Inner Volume. Conversely, if another investor wants to buy immediately at 1165 yuan and the order executes 30 lots, these are counted as Outer Volume.

Five-Level Quotes and Order Book Reading

Five-level quotes are the first thing most stock investors see when opening their trading app, but many beginners don’t fully understand what they mean.

The five-level quote consists of buy and sell sides. The left side is Buy Five Levels (often shown in green), representing the top five highest bid prices; the right side is Sell Five Levels (usually in red), representing the lowest five ask prices. For example, “Buy 1 at 203.5 yuan / 971 lots” indicates the highest bid price currently willing to buy, while “Sell 1 at 204.0 yuan / 350 lots” shows the lowest ask price.

It’s important to note that these five-level quotes are just Order Entrustments; these orders can be withdrawn at any time and do not necessarily result in transactions. The actual transactions are what count towards inner and outer volume.

Inner-Outer Volume Ratio: Assessing the Balance of Buying and Selling Power

The most closely watched short-term indicator is the Inner-Outer Volume Ratio, which compares inner volume and outer volume.

Inner-Outer Volume Ratio = Inner Volume ÷ Outer Volume

Based on this ratio, traders can quickly gauge the current market momentum:

• Ratio > 1: Inner volume exceeds outer volume, indicating a stronger bearish sentiment, sellers are willing to lower prices, a bearish signal.
• Ratio < 1: Inner volume is less than outer volume, indicating bullish strength, buyers are eager to chase prices, generally a bullish signal.
• Ratio = 1: Buying and selling forces are balanced, the market is in a stalemate, and the future direction is uncertain.

Practical Application: How to Combine Price Action with Inner-Outer Volume

Simply looking at the ratio alone isn’t enough. True trading experts combine inner-outer volume with price trends, trading volume, and order book structure:

• Outer volume significantly larger than inner volume, with the price rising steadily and volume increasing—this indicates a healthy bullish pattern. Buyers dominate, pushing prices higher with strong momentum, suggesting short-term upward potential.

• Inner volume far exceeds outer volume, with the price falling and volume rising—a typical bearish signal. Sellers control the scene, with strong selling pressure, leading to downward price movement.

However, market phenomena can be deceptive:

• Outer volume much larger than inner volume, but the price remains sideways or even declines, with volume fluctuating wildly—be cautious, this could be a “false bullish” setup. Major players may be stacking large sell orders at levels one to three, enticing retail investors to chase prices, while secretly selling off in the background. Price may suddenly reverse downward.

• Inner volume larger than outer volume, but the price slowly rises with strange volume fluctuations—be alert for a “false bearish” trap. Major players might be stacking buy orders at levels one to three to lure retail investors into selling, while secretly accumulating at low prices. In such cases, prices often continue upward, trapping unwary investors.

Support and Resistance Zones: Advanced Use of Inner-Outer Volume Ratio

Beyond simply judging buying and selling urgency, technical analysis emphasizes identifying Support Zones and Resistance Zones.

Formation of Support Zones

Although a larger inner volume than outer volume indicates sellers are more eager, when the price falls to a certain level but cannot break below, it often means a large number of buyers believe the stock is cheap at that level. They expect a rebound and are willing to place buy orders there. This forms a Support Zone—a defensive line against selling pressure. Traders can consider entering long positions near support zones.

Logic of Resistance Zones and Exit Strategies

Conversely, when outer volume remains strong compared to inner volume, but the price encounters resistance at a certain level and cannot break through, that level becomes a Resistance Zone. This often occurs because early buyers at high prices now see the stock returning to that level and rush to exit. When the stock approaches, they sell en masse. This selling pressure prevents the price from rising further, creating a new resistance. The market’s buying power is exhausted, and the price may either decline or surge until it hits the next support or resistance level.

Range Trading Strategies

Practically, traders often operate within these zones: buy near support, sell near resistance.

• When the price dips to support, consider long positions.
• When the price reaches resistance, consider reducing holdings or shorting.
• When the price hits resistance, consider shorting.
• When the price falls back to support, consider going long again.

As long as the stock oscillates within this range, this strategy can be repeatedly applied for profit.

However, if the stock breaks below support or breaks above resistance, the situation changes. This indicates that previous support buying has failed to absorb selling pressure, or that selling has been fully absorbed by strong buying. The price then either continues downward or upward sharply until reaching the next support or resistance level.

Advantages and Limitations of Using Inner-Outer Volume as a Trading Tool

Three Major Advantages

Real-time responsiveness—Inner and outer volume data update simultaneously with transactions, reflecting the urgency of buy and sell actions instantly, with no delay.

Easy to grasp—The concept is straightforward, requiring no complex calculations, suitable for beginners.

Enhanced predictive power when combined with other indicators—Using inner-outer volume alongside order book structure, volume changes, and technical patterns can significantly improve short-term trend predictions.

Three Major Limitations

Susceptible to manipulation by major players—As previously mentioned, phenomena like “诱多” (诱多) and “诱空” (诱空) can be artificially created through repeated placing and canceling of orders, making the inner-outer volume data potentially deceptive.

Only reflects short-term dynamics—Inner and outer volume capture immediate transaction behavior but are limited in predicting medium- and long-term trends.

Can be distorted if used in isolation—Focusing solely on the ratio without considering volume changes, price position, or fundamental information can lead to incorrect judgments.

Summary: Inner and Outer Volume as a Market Sentiment Mirror

Inner and outer volume fundamentally serve as indicators to measure the relative strength of buying and selling forces in the market. By comparing inner and outer volume, investors can quickly gauge the mood and urgency of market participants.

When inner volume dominates, sellers are more anxious, increasing the risk of price decline; when outer volume dominates, buyers are active, increasing the likelihood of price rise.

However, no single indicator guarantees profits. Inner-outer volume is just one tool in technical analysis. It should be used in conjunction with support and resistance levels, volume analysis, candlestick patterns, and fundamental factors. Diligent research and preparation are essential to truly improve trading success.

The stronger your ability to read inner and outer volume, the more sensitive you are to short-term market movements. To become a true winner, continuous practice and interaction with the market are necessary to refine your understanding over time.