Mastering the practical application of external and internal trading volumes: The essential market secrets every short-term investor must understand

In stock trading, many investors stare at charting software but cannot understand the meaning behind the data. Besides stock price and price change percentage, there are three key indicators often discussed: “internal volume,” “external volume,” and the “internal-external volume ratio.” But what do these actually represent? How can changes in external volume help infer short-term capital flow? This article guides you to a deeper understanding of these order book signals.

The Logic Behind Buy and Sell Transactions: Who Initiates Price Changes?

To understand external and internal volume, first recognize the difference between “active buying” and “active selling.” There are two types of trading methods in the market:【Order Placement】and【Real-time Transactions】. The core difference between internal and external volume lies in: who actively matches the other party’s order.

In the stock market, sellers aim to raise the asking price (sell order price), while buyers aim to lower the purchase price (buy order price). When a transaction occurs at the buy order price, it indicates the seller is willing to lower the price actively to match, and this transaction volume is recorded as “internal volume”; when a transaction occurs at the sell order price, it indicates the buyer is willing to raise the price actively to buy, and this volume is recorded as “external volume.”

For example, TSMC’s order book shows a buy order at 1160 yuan/1415 shares (buyers willing to buy 1415 shares at this price), and a sell order at 1165 yuan/281 shares (sellers willing to sell 281 shares at this price). If an investor wants to sell immediately and places an order at 1160 to sell 50 shares, this 50 shares are counted as internal volume; if they want to buy immediately and place an order at 1165 to buy 30 shares, this 30 shares are counted as external volume.

Level 5 Quotes: A Real-time Snapshot of the Order Book

Opening the brokerage app’s homepage, the most immediately visible feature is the Level 5 quote. This is a bid-ask order book composed of buy and sell orders, showing the top five best bid and ask prices, along with the corresponding order quantities.

The left side (usually green) displays the top five buy orders, indicating the highest bid prices and quantities; the right side (usually red) shows the top five sell orders, indicating the lowest ask prices and quantities. For example, “Buy 1” (203.5/971 shares) is the highest bid in the market, and “Sell 1” (204.0/350 shares) is the lowest ask.

Note that the Level 5 quote only reflects the current order placement status and does not necessarily represent actual transactions, as orders can be canceled at any time.

Judging External Volume Strength: Practical Significance of the Internal-External Volume Ratio

Short-term investors are most concerned with whether transactions are happening more on the internal or external side. This involves calculating the “internal-external volume ratio”:

Internal-External Volume Ratio = Internal Volume ÷ External Volume

• Ratio > 1: Internal volume exceeds external volume, indicating sellers are more active in unloading, market is bearish, a bearish signal.
• Ratio < 1: Internal volume is less than external volume, indicating buyers are more active in chasing prices, market is bullish, a bullish signal.
• Ratio = 1: Buying and selling forces are balanced, market is in consolidation.

Changes in External Volume Combined with Price Trends: Techniques for Accurate Interpretation

Looking at the internal-external volume ratio alone is not enough. It must be combined with stock price, volume, and order book structure for comprehensive analysis:

• External volume > Internal volume and price rising: Buyers are actively entering the market and pushing prices higher, a healthy bullish signal; if volume also increases, short-term upward momentum is stronger.
• Internal volume > External volume and price falling: Sellers actively unload, causing prices to decline, a healthy bearish signal; if volume increases, downward pressure intensifies.
• External volume > Internal volume but price not rising, instead falling, with volume fluctuating: Be alert for “fake bullish” signals. Major players may be stacking sell orders to lure retail investors into buying actively, while secretly selling off. For example, during sideways movement, external volume is significantly higher than internal, but the sell orders at levels 1 to 3 keep increasing, followed by a sudden drop in price—this is a typical false bullish signal.
• Internal volume > External volume but price not falling, instead rising, with volume fluctuating: Watch out for “fake bearish” signals. Major players may be stacking buy orders to induce retail investors to sell actively, while secretly accumulating shares. For example, during slight upward movement, internal volume exceeds external, with buy orders at levels 1 to 3 continuously stacking, and the price continues to rise—this indicates a false bearish signal.

Support and Resistance Zones: Advanced Applications of External and Internal Volume

Beyond analyzing buying and selling strength, technical analysis also focuses on identifying support and resistance levels.

Support Zone: A price level where the stock stops falling and rebounds, indicating strong buying interest at that level. Buyers believe the price is low enough and expect a rebound. Even if internal volume exceeds external volume (more sellers), if the price stops declining at the support zone, investors may consider bullish positions.

Resistance Zone: A price level where the stock struggles to break through and reverses downward. Even if external volume exceeds internal volume (more buyers), if the price cannot rise past this level, it often indicates previous buyers at that level are reluctant to sell at a loss, leading to heavy selling pressure when approached.

Practical advice: When a stock consolidates within support and resistance zones, adopt a “buy at support, sell at resistance” strategy. However, if the stock breaks below support or above resistance, it indicates the previous buying or selling forces are no longer sufficient to sustain the current trend, and the price may enter a one-sided move until reaching the next support or resistance level.

Advantages and Limitations of Internal and External Volume Data

Advantages:

• Real-time updates synchronized with transactions, quickly reflecting the active buying and selling in the market.
• Simple and easy to understand, no complex calculations needed.
• When combined with bid-ask orders and volume analysis, can improve short-term trend judgment accuracy.

Limitations:

• Can be manipulated by major players; they may artificially create false signals through “placing, executing, and canceling” orders. Relying solely on this data can lead to misjudgments.
• Only reflects current transaction behavior; cannot determine long-term trends.
• Prone to distortion; must be used together with volume, technical analysis, and fundamental analysis for better accuracy.

Conclusion

Internal and external volume are key indicators for measuring market buying and selling strength. Comparing the two can quickly reveal the urgency of both sides. When internal volume exceeds external volume, sellers are eager to execute trades, increasing the likelihood of a price decline; when external volume exceeds internal volume, buyers are actively chasing prices, increasing the chance of a price rise.

However, financial investment decisions cannot rely on a single indicator. The internal-external volume ratio is just one tool in technical analysis. It should be combined with support and resistance levels, fundamental analysis, and macroeconomic factors to truly improve trading success. Remember: combining knowledge with practice is the right path toward stable profits.