How to judge when the foreign volume exceeds the domestic volume? An article to master the secrets of stock buying and selling strength

In stock trading, many investors focus on the market data and see the key figures “internal volume” and “external volume,” but often do not understand what they truly represent behind these numbers. More importantly, when external volume exceeds internal volume, how should investors interpret this? This article will guide you to a deeper understanding of these seemingly mysterious indicators and teach you how to use them to inform actual trading decisions.

Understanding Internal and External Volume Through Transaction Logic

To understand internal and external volume, first grasp the two main active trading methods: active buying and active selling. Buyers in the market place “bid prices” hoping to lower the transaction price, while sellers place “ask prices” hoping to raise the transaction price. The final transaction point determines how the data is categorized.

When a stock is finally traded at the bid price, it indicates that the seller actively accepted the buyer’s offer, and this transaction volume is recorded as “internal volume”. This reflects a higher seller initiative, willing to accept a lower price, which is generally considered a bearish signal.

Conversely, if a stock is traded at the ask price, it means the buyer actively increased their bid to purchase, and this transaction volume is recorded as “external volume”. This shows strong buying momentum, willing to transact at higher prices, often viewed as a bullish signal.

For example, in TSMC’s quote, if the best bid is 1160 yuan for 1,415 shares and the best ask is 1165 yuan for 281 shares, then a direct sale at 1160 yuan for 50 shares belongs to internal volume; a direct purchase at 1165 yuan for 30 shares belongs to external volume.

Composition and Significance of the Five-Level Quote

The five-level quote you see when opening a broker app is actually composed of internal and external volume data. The green area on the left shows the top five bid prices (the highest five buy orders and their quantities), and the red area on the right shows the top five ask prices (the lowest five sell orders and their quantities).

The first row, bid one and ask one, are the most critical—bid one represents the highest current bid price, and ask one the lowest ask price. The difference between bid one and ask one is called the “spread.” The narrower the spread, the better the liquidity.

However, note that the five-level quote displays only pending orders, not completed transactions. These can be canceled at any time, so they should not be solely relied upon to predict market trends.

Calculation and Interpretation of Internal and External Volume Ratio

Short-term investors care most about whether the final transaction volume falls into internal or external volume, which leads to the important indicator “internal-external volume ratio.” Its calculation formula is straightforward:

Internal-External Volume Ratio = Internal Volume ÷ External Volume

The ratio can result in three situations:

• Ratio > 1: Internal volume exceeds external volume, indicating sellers are more eager to complete trades than buyers, suggesting a market with strong bearish sentiment, a bearish signal.

• Ratio < 1: Internal volume is less than external volume, meaning external volume exceeds internal volume, showing strong buying willingness and bullish sentiment, usually a bullish signal.

• Ratio = 1: Both sides are equally strong, indicating a stalemate in the market, with an unclear trend; wait for stronger signals.

Practical Judgment When External Volume Exceeds Internal Volume

When external volume exceeds internal volume, do not rush to go long immediately. The real opportunity lies in combining this indicator with other factors.

External volume > internal volume and the stock price rises with increased volume is a healthy bullish signal. Buyers actively push up the price, and trading activity is lively, indicating sufficient short-term upward momentum.

However, if external volume > internal volume but the stock price remains stagnant or declines, with fluctuating volume, beware of a “false bullish trap.” Major players might be deliberately stacking buy orders to attract retail investors, while secretly selling off. For example, if the stock consolidates at high levels with external volume significantly higher than internal volume, but sell orders keep increasing, and then the price suddenly plunges, this is a classic trap to lure buyers.

Conversely, if internal volume > external volume but the price rises instead of falling, with strange volume fluctuations, watch out for a “false bearish trap.” Major players might be placing large buy orders to attract retail selling, secretly absorbing the sell orders. After some accumulation, the stock may suddenly start a strong upward move.

Therefore, external volume exceeding internal volume is just one signal; it must be combined with volume, price position, fundamental analysis, and other factors for comprehensive judgment.

Supporting and Resistance Zones in Trading

The most powerful application of internal and external volume data is combining it with support and resistance zones.

When a stock stops falling at a certain price level, it indicates enough buyers are willing to step in at that price, forming a support zone. Buyers in this zone expect the price to rebound, so traders might consider going long here.

Conversely, if buying interest (external volume > internal volume) is strong but the price cannot break through a certain level, it forms a resistance zone. Resistance zones often gather chips bought at high levels that are now trapped, unwilling to sell at a loss or hold long-term. When the price approaches, they tend to sell to cut losses, hindering further rise.

Practical strategies include:

• Going long near support zones
• Closing or shorting near resistance zones
• When the price breaks below support, it indicates selling pressure is overwhelming, and a further decline is likely
• When the price breaks above resistance, it suggests selling pressure has been absorbed, and an upward trend may follow

Pros and Cons of Internal and External Volume Indicators

Advantages:

• Real-time updates reflect the immediate buying and selling dynamics
• Simple concept, easy to understand without complex calculations
• When combined with order book structure and volume, it can significantly improve short-term trend predictions

Disadvantages:

• Clever major players can manipulate fake signals by “placing orders, pushing transactions, then canceling” to create false internal/external volume data
• Relying solely on these indicators can lead to traps for retail investors
• They only reflect current transaction behavior and cannot determine long-term trends, which may lead to misjudgments

Therefore, it is recommended: Never rely solely on internal-external volume ratio. It should be combined with volume, price position, technical analysis, and fundamental factors to reduce the risk of deception.

Summary: Internal and External Volume Are Just Keys in Your Trading Toolbox

Internal and external volume fundamentally measure the strength of buying and selling forces in the market. By comparing their transaction volumes, investors can quickly gauge the urgency of both sides. When internal volume is larger, sellers are eager to exit, increasing the probability of a decline; when external volume is larger, buyers are eager to chase prices, increasing the chance of an upward move.

However, financial markets are like a vast river; relying on a single indicator cannot guarantee success. Internal-external volume ratio, support and resistance zones, and volume are just tools in technical analysis. It is also essential to consider company fundamentals and macroeconomic conditions to truly improve trading success rates.

Beginners are advised to practice in paper trading or demo accounts, using real operations to deepen their understanding of these concepts, ultimately enabling them to apply them skillfully in real markets.