The meaning of internal and external trading in stock trading that must be understood | Tips for interpreting order book buying and selling strength

Why Understand the Inner and Outer Plates?

Many investors, when opening trading software, not only focus on the opening price, highest price, and lowest price but also see the data for “inner plate” and “outer plate,” as well as the commonly discussed “inner vs. outer plate ratio.” These three indicators may seem complex, but in reality, they are key tools for judging short-term capital flow and understanding market buying and selling forces.

To truly grasp the meaning of inner and outer plates, one must first understand the logic behind stock transactions—who is actively driving the trades.

Explanation of Inner and Outer Plates | The Difference Between Active Buying and Active Selling

Before a stock transaction, there are two types of orders in the market: “bid price” (the price sellers hope for) and “ask price” (the price buyers hope for). The key is: who is willing to actively concede to complete the trade.

Definition of Inner Plate: When the stock price trades at the bid price, the number of shares sold is counted as the inner plate. This indicates that sellers are more eager and willing to accept the buyers’ bid to complete the transaction. For example, if a buyer places an order at 1160 yuan for 1,415 shares, and the seller doesn’t want to wait and sells 50 shares directly at 1160 yuan, these 50 shares are counted as the inner plate. An increase in the inner plate usually indicates a more bearish sentiment.

Definition of Outer Plate: When the stock price trades at the ask price, the number of shares bought is counted as the outer plate. This shows that buyers are more proactive and willing to pay a higher price to buy. For example, if a seller places an order at 1165 yuan for 281 shares, and a buyer doesn’t want to miss out and buys 30 shares directly at 1165 yuan, these 30 shares are counted as the outer plate. An increase in the outer plate usually indicates a more bullish sentiment.

The Five-Level Quote as the Foundation for Understanding Market Depth

To correctly interpret the meaning of inner and outer plates, you must first understand the composition of the five-level quote.

The five-level quote shows the market’s real-time top five bid prices and top five ask prices, including the corresponding order volumes. The left side (usually green) represents the top five bid orders with the highest prices, and the right side (usually red) shows the top five ask orders with the lowest prices.

For example, “Bid 1 at 203.5 yuan / 971 shares” indicates the highest bid in the market, while “Ask 1 at 204.0 yuan / 350 shares” is the lowest ask. It’s important to note that these five-level quotes only display pending orders; they may not necessarily be executed, as orders can be canceled at any time.

Calculation and Application of Inner and Outer Plate Ratios

Calculation formula: Inner-Outer Ratio = Inner Plate Volume ÷ Outer Plate Volume

Based on the ratio, you can judge the market’s buying and selling strength:

• Ratio > 1: Inner plate volume exceeds outer plate volume, indicating sellers are eager to sell at lower prices, market sentiment is bearish, a bearish signal.
• Ratio < 1: Inner plate volume is less than outer plate volume, indicating buyers are eager to buy at higher prices, market sentiment is bullish, a bullish signal.
• Ratio = 1: Buying and selling forces are balanced, the market is in stalemate, and the future direction is uncertain; more clear signals are needed.

How to Combine Price and Volume to Use the Inner-Outer Ratio

While the concept of inner and outer plates seems simple, practical application requires combining it with other factors:

Healthy Bullish Signal: Outer plate > inner plate and the price is rising, indicating buyers are actively pushing the price higher. If accompanied by increased volume, the short-term upward momentum is stronger.

Healthy Bearish Signal: Inner plate > outer plate and the price is falling, indicating sellers are actively pushing the price down. If volume increases, the short-term downward pressure is greater.

Beware of Fake Bullish Signals: Outer plate > inner plate but the price is sideways or falling, with unstable volume fluctuations, possibly manipulated by major players placing sell orders to induce retail investors to buy, while secretly selling off.

Beware of Fake Bearish Signals: Inner plate > outer plate but the price is rising instead of falling, with volume fluctuating wildly, possibly due to major players placing buy orders to attract retail investors to sell, while secretly accumulating.

Practical Strategies Using Support and Resistance Zones

After understanding the meaning of inner and outer plates, combining this with support and resistance levels can improve prediction accuracy.

Application of Support Zones: When the price drops to a certain level and cannot go lower, it indicates many investors believe this price is cheap and are willing to buy. This level is a support zone. At this point, even if the inner plate > outer plate, it may trigger buying enthusiasm, leading to a rebound.

Application of Resistance Zones: When the price rises and encounters strong buying but cannot break through a certain level, it indicates previous buyers at that level are eager to exit, creating selling pressure. This level is a resistance zone. Even if the outer plate > inner plate, the price may not break through this barrier.

Practical Trading Advice: Operate between support and resistance zones—buy when the price hits support, sell when it reaches resistance. If the price breaks below support or above resistance, a trend often forms until the next support or resistance level is reached.

Advantages and Limitations of Inner and Outer Plate Indicators

Advantages: Data for inner and outer plates updates simultaneously with transactions, reflecting active buying and selling in real-time; simple and easy to understand; when combined with order book and volume analysis, can improve short-term trend judgment.

Limitations: Inner and outer plates can be manipulated by major players through placing and withdrawing orders to create false signals; relying solely on them can lead to wrong directions; they reflect current transaction behavior but cannot determine long-term trends; should be used in conjunction with volume, technical analysis, and fundamental analysis, as relying on them alone can be misleading.

Summary

The core of the inner and outer plates is that they measure the relative strength of buying and selling forces in the market. When the inner plate exceeds the outer plate, sellers are eager to sell at bid prices, increasing the likelihood of a decline; when the outer plate exceeds the inner plate, buyers are eager to buy at ask prices, increasing the likelihood of a rise.

However, investing cannot rely on a single indicator. The inner-outer ratio is just one tool in technical analysis. True investment decisions should also consider company fundamentals, the overall economic environment, and market sentiment. Only by integrating various indicators and fundamental analysis can traders improve their success rate in stock trading.