Is the internal market volume greater than the external market, causing stock prices to rise? Revealing the true relationship between buying and selling strength and stock price movements

When opening trading software, have you ever been confused about why the internal volume is greater than the external volume, yet the stock price still rises? Or seen the external volume far surpass the internal volume, but the price unexpectedly falls? These seemingly contradictory phenomena are what make technical analysis both fascinating and easily misleading. The data behind internal and external volume hide the psychological tug-of-war between market buyers and sellers. Understanding their true meaning is key to avoiding detours in stock trading.

The Essence of Internal and External Volume: Who Is Driving the Trades

To understand internal and external volume, first grasp the logic of stock transaction mechanics. Every trade in the market stems from a basic power relationship—who is willing to compromise, who pays the price.

At any moment, sellers want to push prices higher (ask price), buyers want to lower prices (bid price). These forces constantly compete, forming the order book structure of five levels. The critical point is: Who actively approaches the other side is recorded as the other party in the transaction volume.

When an investor chooses to sell immediately at the bid price, it indicates the seller is actively yielding, matching the buyer’s bid—this trade counts as internal volume, reflecting the seller’s aggressiveness. Conversely, if an investor wants to buy immediately at the ask price, willing to pay a premium, it shows the buyer is actively bidding up—this trade counts as external volume, reflecting the buyer’s pursuit strength.

For example, TSMC’s current bid is 1160 yuan/1,415 lots, ask is 1165 yuan/281 lots. Trades at 1160 are internal volume; those at 1165 are external volume. More internal volume suggests sellers are eager; more external volume indicates active buyers.

Market Truths When Buying and Selling Forces Are Unbalanced

Short-term investors pay close attention to the ratio of internal to external volume to catch moments when buying and selling forces are out of balance. The calculation is simple:

Internal/External Ratio = Internal Volume ÷ External Volume

When the ratio exceeds 1, internal > external, theoretically favoring the bears. But in actual trading, it’s not always so straightforward. This imbalance can reflect various market states: a ratio of 1 indicates balanced forces and a stalemate; a ratio significantly above 1 suggests high seller activity, but whether this leads to a price drop depends on more signals.

This leads to a key market phenomenon—cases where internal volume exceeds external volume yet the price rises.

Internal Volume > External Volume but Price Rises: Hidden Market Signals

Many novice investors get confused when they see this. In reality, it reflects market complexity. More internal volume means sellers are more active, yet the price still climbs. This is often due to several reasons:

First, changes in trade structure. Even if internal volume is large, if most of it occurs at higher prices, and external volume mainly at lower prices, the average transaction price remains high, pushing the stock price up. This indicates major players are executing trades at relatively high levels, creating a false appearance of active trading.

Second, market sentiment and fundamentals may dominate short-term trends. Internal and external volume only show transaction behavior, not why investors are trading. When positive news, industry optimism, or capital inflows occur, buyers will chase prices even if internal volume is large. External volume may be smaller, but buyers’ determination can offset sellers’ activity.

Third, it could be a manipulation tactic—“诱空” (诱导空头,诱空). Experienced short-term traders or major funds may deliberately place large buy orders (bid prices) to attract retail sellers, forming large internal volume. Meanwhile, they quietly absorb shares, and when the time is right, push the price higher. Superficially, internal volume > external volume, but in reality, the bulls are accumulating at low levels. Relying solely on internal and external volume can mislead investors into wrong decisions.

Using Support and Resistance Zones to Deepen Judgment

Relying solely on the internal/external volume ratio is insufficient. True technical analysts combine support zones and resistance zones to verify signals.

When the price drops to a certain level and stops falling, that’s a support zone—many investors believe the price is cheap enough to build positions. Even if internal volume exceeds external volume here, if the price is near support, buyer enthusiasm often increases, expecting a rebound. In this case, rising internal volume is not a bearish signal but a sign of accumulation.

Conversely, resistance zones are levels where upward movement stalls. When approaching resistance, investors who bought at higher levels may rush to exit, creating strong selling pressure. Even if external volume is high, if the price cannot break through resistance, these buy orders turn into new sell pressure. At this point, external volume data loses its significance.

Practical trading tip: Operate within support and resistance zones—buy near support, consider reducing or reversing positions near resistance. If the price breaks below support or above resistance, a trend often forms, leading to sustained decline or rise until the next support or resistance level.

The Traps and Solutions of Distorted Internal and External Volume

The main risk of internal and external volume analysis is susceptibility to manipulation. Major players can cycle through “placing orders → executing trades → canceling orders” to create false signals, misleading retail traders. Common traps include:

诱空 (诱导空头): During sideways movement, external volume exceeds internal volume, seeming bullish. But close inspection reveals sell orders at levels one to three below the current price are increasing, and suddenly the price plunges. This is a deliberate illusion by the main force to create a false bullish appearance.

诱多 (诱导多头): During slight upward movement, internal volume exceeds external volume, seeming bullish. But buy orders at levels one to three above are stacking up, and the price continues higher. This is a typical manipulation where the main force uses buy orders at low levels to lure retail into selling, then absorbs shares and pushes the price up.

Clear solution: Do not rely solely on any single indicator. Combine internal/external volume with volume analysis, candlestick patterns, support/resistance levels, and fundamental information. When multiple signals align, the probability of correct judgment increases. For example, external volume > internal volume plus rising price and increasing volume indicates a healthy bullish signal; conversely, internal volume > external volume with falling price and expanding volume suggests a bearish trend.

A Complete Framework for Technical Analysis

Internal and external volume are just one part of technical analysis. A comprehensive approach includes price action, volume, cycle patterns, support/resistance, and market sentiment.

In practice, investors should develop their own judgment system: first identify trend direction (support/resistance zones), then analyze volume and internal/external signals, and finally interpret candlestick patterns and chart formations. Only when multiple signals point in the same direction can one confidently place trades.

Additionally, fundamental analysis and macroeconomic conditions are equally important. All technical indicators can fail due to major fundamental shifts or policy changes. No matter how sophisticated, technical analysis cannot predict sudden earnings drops or industry policy adjustments. True investment success comes from integrating multiple layers of information and managing risks effectively.

Conclusion

Internal volume exceeding external volume and the stock price rising is not abnormal but a result of complex market interactions. Relying solely on the internal/external volume ratio for decision-making often leads to falling into traps set by major players. Smart investors should treat internal and external volume as auxiliary tools, combining them with support/resistance zones, volume, candlestick patterns, and fundamental insights. Always stay attentive to company fundamentals and industry trends.

To improve trading skills, practice with demo accounts. Many trading platforms offer virtual environments where investors can experience real market conditions risk-free, gradually building their trading systems and risk awareness. Remember, in financial markets, there are no absolute indicators—only continuous learning and adaptation.