Inner and outer plates in stock trading: key indicators to understand buying and selling power

When analyzing stocks, investors often see data such as “internal volume,” “external volume,” and the “internal-external volume ratio.” For newcomers to the market, these concepts may seem vague, but in reality, they are the most direct tools for judging short-term trends and perceiving market sentiment. Mastering the meaning of internal and external volume is equivalent to understanding the psychological dynamics of both buyers and sellers in the market.

Who is Driving the Transactions? Understanding the Essence of Internal and External Volume

The essence of stock trading is a contest of strength between buyers and sellers. Before a transaction occurs, there are two prices in the market: the “ask price” that sellers expect and the “bid price” that buyers expect.

When the stock price trades at the bid price—sellers do not wait and sell directly at the price buyers are willing to pay—this transaction’s volume is recorded as internal volume. This reflects the sellers’ urgency; they are unwilling to wait and are willing to compromise downward. An increase in internal volume = more bearish traders are getting more anxious.

When the stock price trades at the ask price—buyers do not wait and buy directly at the seller’s asking price—this transaction’s volume is recorded as external volume. This indicates buyers’ proactive psychology; they are eager to chase prices and enter the market. An increase in external volume = more bullish traders are getting more eager.

For example, if the bid side shows “1160 yuan / 1415 lots,” it means 1415 lots are wanting to buy at 1160 yuan; if the ask side shows “1165 yuan / 281 lots,” it means 281 lots want to sell at 1165 yuan. When investors don’t want to wait and sell directly at 1160 yuan (the best bid), those 50 lots go into internal volume; when they buy directly at 1165 yuan for 30 lots, those go into external volume.

Level 5 Quotes: Visualizing Market’s Immediate Buying and Selling Intentions

The “Level 5 quotes” you see on your broker app are actually a visual representation of the internal-external volume concept.

The buy side Level 5 (usually marked in green) lists the top 5 highest bid orders, representing how many buyers are willing to buy at those prices and the volume they are willing to trade. The sell side Level 5 (usually marked in red) lists the top 5 lowest ask orders, indicating how many sellers are willing to sell at those prices.

The difference between “buy one” and “sell one” prices is called the bid-ask spread, reflecting the market’s liquidity. Note that the numbers on the Level 5 are just pending orders; they can be withdrawn at any time and may not all be executed.

Internal-External Volume Ratio: Reading Market Psychology in Numbers

The internal-external volume ratio is a metric to quantify the strength comparison between buying and selling forces, calculated simply as:

Internal-External Volume Ratio = Internal Volume ÷ External Volume

Based on the ratio’s value, you can quickly gauge market bias:

Ratio > 1 (Internal > External): Indicates sellers are more eager, willing to cut prices actively, and market sentiment is strongly bearish. In this case, internal volume > external volume with rising prices is rare and often signals a potential pullback.

Ratio < 1 (Internal < External): Indicates buyers are more eager, willing to chase prices, and market sentiment is bullish. This is a relatively optimistic signal.

Ratio ≈ 1 (Internal ≈ External): Indicates a balance of forces; the market is in a stalemate. The future direction is uncertain, and a clear breakout signal is needed.

Practical Application: Trading Strategies in Different Scenarios

The main value of the internal-external volume ratio is helping traders quickly assess the dominant market force. However, relying on a single indicator can be misleading; it should be combined with price trends, volume, and order book structure for comprehensive analysis.

Healthy Bullish and Bearish Signals

External volume > Internal volume, and price rising → Buyers are actively pushing prices higher, indicating a healthy uptrend. If volume also increases, it shows high participation, and short-term upward momentum is strong.

Internal volume > External volume, and price falling → Sellers actively pushing prices down, indicating a healthy downtrend. If volume also increases, it confirms genuine selling pressure, increasing short-term downside risk.

Beware of False Signals: Inducing Bullish or Bearish Moves

External volume > Internal volume but price does not rise but falls, with fluctuating volume → This may be a manipulation by major players creating false buy signals. They place large buy orders to lure retail investors to sell, while secretly accumulating positions through other channels. When the time is right, they cancel orders or change tactics. For example, if the price consolidates in a range with external volume significantly higher than internal, but the sell orders from S1 to S3 keep increasing, then suddenly the price plunges—this is a classic “baiting” trap.

Internal volume > External volume but price does not fall but rises, with volume fluctuating → This may be a manipulation to fake selling signals. They place large sell orders to scare retail investors into selling, while continuously stacking buy orders at the best bid levels to accumulate positions. Eventually, the price continues upward. This “inducing short” tactic is also deceptive.

Why does the price rise even when internal volume exceeds external volume?

In reality, there are cases where internal volume exceeds external volume but prices still rise. This is often due to fundamental changes, major news stimuli, or sudden shifts in market sentiment that overpower technical weakness signals. It reminds us that technical indicators are only references, not absolute truths.

Support and Resistance Zones: Structural Meaning Behind Internal and External Volume

The core of technical analysis is observing the interaction between price and volume to forecast future trends. Support and resistance zones are the most intuitive expressions of this interaction.

Formation of Support Zones and Trading Opportunities

When the price drops to a certain level and stops falling, it indicates a large number of buyers are willing to enter at that price. They believe it is cheap enough to hold long-term or rebound. This level is called a support zone.

In a support zone, even if internal volume > external volume, prices often rebound. If investors see such signals near support zones, they can consider long positions, expecting a rebound.

Formation of Resistance Zones and Risk Warnings

Conversely, when the price rises to a certain level and encounters resistance, it indicates many sellers are ready to unload at that price. These are often investors who bought at high levels, are trapped, and want to cut losses. Once the price approaches that level, they rush to sell. This level is called a resistance zone.

In a resistance zone, even if external volume > internal volume, prices often struggle to break through. Buyers, no matter how aggressive, cannot absorb the selling pressure from trapped positions, eventually exhausting buying momentum and forming new resistance.

Range Trading Strategies

Based on support and resistance zones, savvy traders often perform “range trading” within these areas:

• Buy near support zones → Expect rebound
• Sell near resistance zones → Anticipate pullback

However, if the price breaks above resistance or below support, the situation changes entirely. It indicates the previous supply-demand structure has been broken—either new buying momentum is strong enough to absorb all selling pressure or new selling pressure has overwhelmed buyers. Usually, this leads to a new trend: a rally until the next resistance zone or a decline until the next support zone.

Strengths and Limitations of Internal-External Volume Indicators

Advantages

Real-time updates → Data on internal and external volume are updated simultaneously with transactions, reflecting changes in主动性 immediately.

Easy to understand → The concept is straightforward; no complex calculations needed, suitable for beginners.

A powerful tool for order book analysis → When combined with bid/ask orders and volume, it can significantly improve short-term trend judgment accuracy.

Limitations

Prone to manipulation → Major players can create false signals by “placing orders → executing → canceling,” artificially distorting internal and external volume data. Relying solely on this can mislead traders.

Only reflects current behavior → Internal and external volume are records of current transactions; they cannot determine long-term trends and have inherent short-term limitations.

Can be distorted if used alone → Without considering volume, technical patterns, and fundamentals, superficial signals can be misleading.

Summary: Becoming a Smart User of Internal and External Volume

The internal-external volume ratio is a practical indicator to measure the strength of buying and selling forces. By comparing the volumes, investors can quickly grasp the changing sentiment of market participants—how eager sellers are and how active buyers are.

Internal volume > External volume indicates strong selling willingness, usually putting downward pressure on prices; External volume > Internal volume indicates strong buying willingness, often leading to upward momentum. But the market is far more complex than a single indicator can explain, driven by fundamentals, policies, and sentiment.

Therefore, smart traders should treat the internal-external volume ratio as part of their “information input,” combining it with support/resistance zones, volume changes, technical patterns, and paying close attention to company fundamentals and macroeconomic conditions. Only then can they improve their success rate. Relying solely on any single technical indicator will ultimately lead to losses.