Understanding the internal market is key to seeing through the order book: The most overlooked secret in stock trading

When opening trading software, besides stock prices and price changes, have you noticed the data called “internal volume” and “external volume”? Many investors actually ignore these indicators, but savvy short-term traders rely on them to judge the main force’s movements. What does internal volume mean? Simply put, it reflects who is leading this buying and selling game — this is the key to determining short-term trends.

The Hidden Trading Logic Behind Internal Volume

The essence of stock transactions is that buyers and sellers reach an agreement between bid price and ask price. But whoever takes the initiative to concede will be recorded.

When investors are eager to offload and willing to transact directly at a lower bid price, these transactions are categorized as “internal volume” — indicating that sellers are more urgent and willing to lower prices to sell. This usually hints at high bearish sentiment and more market pessimism.

Conversely, if buyers are eager to cover positions and willing to quickly buy at a higher ask price, these transactions are recorded as “external volume” — showing strong buying power and bullish sentiment.

For example, if a stock has a bid of 1160 yuan/1415 lots and an ask of 1165 yuan/281 lots, and an investor wants to sell immediately at 1160 with a report of 50 lots, these 50 lots are counted as internal volume; if another buyer quickly buys 30 lots at 1165, these 30 lots are external volume.

Reading Market Sentiment from the Five-Price Quote

The five-price quote is the most common screen investors see on brokerage apps, but it’s often misinterpreted. It consists of top five bid prices (green, highest 5 bids) and top five ask prices (red, lowest 5 asks), showing the current market’s top 5 buy and sell orders with their respective lot sizes.

It’s important to note that the five-price quote is just order book information and does not guarantee transactions — orders can be withdrawn at any time. Therefore, when analyzing, don’t just look at the quotes; combine them with actual transaction data of internal and external volume to truly understand market dynamics.

The Internal-External Volume Ratio: A Barometer of Buying and Selling Power

Internal-External Volume Ratio = Internal Volume ÷ External Volume

This simple formula can reveal subtle market changes:

Ratio > 1: Internal volume exceeds external volume, indicating sellers are more active, the market is dominated by bearish sentiment, a bearish signal.

Ratio < 1: External volume exceeds internal volume, buyers are eager to chase higher, bullish sentiment prevails, often seen as a bullish signal.

Ratio = 1: Buying and selling forces are balanced, the market is in stalemate, the next direction is uncertain, requiring stronger signals.

The Internal-External Volume Ratio should not be used alone

Many beginners make the mistake of placing orders based solely on the internal-external volume ratio. In reality, valuable judgment requires multiple dimensions:

When external volume > internal volume and the price rises, it’s a healthy bullish sign, especially if volume also increases, confirming short-term upward momentum.

When internal volume > external volume and the price falls, it confirms bearish dominance, especially if volume shrinks simultaneously, indicating maximum downward pressure.

However, if external volume > internal volume but the price stagnates or volume fluctuates abnormally, beware of “trap plays” — main players may be stacking sell orders at levels one to three to lure retail investors into chasing higher, then suddenly dumping. The reverse “trap” also occurs, where large buy orders create false buying signals while secretly selling off.

Support and Resistance Zones: The Ultimate Application of Internal and External Volume

The most powerful use of internal and external volume data is combining them with support zones and resistance zones for range trading.

When the price drops to a certain level and bounces back, it indicates strong buying interest at that level, forming a support zone. Investors expecting a rebound can consider going long in this area.

Conversely, if strong buying cannot push the price higher and it gets stuck at a certain level, that’s a resistance zone. Usually, this occurs because previous buyers at high levels are reluctant to realize losses, and once the price nears their cost basis, they rush to exit, creating heavy selling pressure.

Practical strategy:

• Buy near support zones when the price dips, and take profits near resistance zones.
• When the price breaks through resistance, chase the breakout.
• When the price falls below support, quickly exit to avoid further losses.

Once the stock breaks support or surpasses resistance, it indicates that current buying or selling pressure is insufficient to sustain the trend, often leading to a one-sided move until the next key support or resistance level appears.

The Dual Nature of Internal Volume: Advantages and Traps

Why focus on internal volume?

Internal volume updates quickly and synchronizes with transactions, providing real-time insight into the主动性 of buyers and sellers; it’s simple to understand and doesn’t require complex calculations; combined with order book structure and volume analysis, it can significantly improve short-term judgment.

But internal volume also has critical weaknesses:

Main players can manipulate data through “placing orders → active transactions → canceling orders” tricks to create false signals. Relying solely on internal volume can be deceiving. It only reflects current transaction behavior and cannot determine long-term trends. Using it for medium- or long-term investing can be costly.

The biggest trap is treating the internal-external volume ratio as a holy grail — no single indicator is infallible. It must be combined with volume, technical analysis, and even fundamental data to make reliable decisions.

Don’t Ignore Internal Volume, But Don’t Rely Blindly on It

What does internal volume mean? It’s a mirror of market sentiment. When internal volume shows sellers rushing to exit, you know panic is spreading; when external volume accumulates, you feel buyers’ enthusiasm.

But true trading experts don’t rely solely on internal volume. They observe price levels, volume changes, support and resistance zones, and even company fundamentals and overall market conditions before making bets. Use internal volume as a reference tool, not a decision-making tool. Only then can you trade more steadily.

In practice, repeatedly observe various combinations of internal and external volume in simulated trading to build a sense of market feel, and finally verify your judgment with real money.