The true meaning of "external volume greater than internal volume": understanding buyer psychology to gain insights into short-term trends

In stock trading, when the external volume exceeds the internal volume, it is an important market signal. Many investors see data such as internal volume, external volume, and the ratio of internal to external volume on trading software, but they do not truly understand the market implications behind these figures. This article will help you deeply understand the phenomenon of external volume being greater than internal volume, and how to apply this knowledge in practice to capture short-term opportunities.

What Are Internal and External Volume? Understanding Buying and Selling Power Through Active Trading

To grasp the significance of external volume surpassing internal volume, first understand the definitions of internal and external volume. The essence of internal and external volume is to distinguish “who is actively driving the transactions.”

In the stock order system, there are two scenarios: sellers aiming to raise the price set “ask prices,” and buyers aiming to lower the price set “bid prices.” When a trade occurs at the bid price, it is recorded as internal volume, indicating that sellers are more aggressive and willing to match buyers’ orders. Conversely, when a trade occurs at the ask price, it is recorded as external volume, indicating that buyers are more aggressive and willing to pay higher prices to buy.

For example, in TSMC, if the bid side shows 1160 yuan with 1,415 lots, and the ask side shows 1165 yuan with 281 lots, then if an investor sells 50 lots directly at 1160 yuan, this counts as internal volume; if another buys 30 lots directly at 1165 yuan, this counts as external volume. Simply put, internal volume reflects seller urgency, while external volume reflects buyer urgency.

How to Read the Level 5 Quote? Real-Time Market Order Book Structure

The Level 5 quote is what every investor first sees when opening their broker app. It is composed of internal and external volume, representing the top five bid prices and the top five ask prices, along with the corresponding order quantities.

The buy five levels are usually shown in green, representing the top five highest bid prices, showing how much buyers are willing to pay and how many lots at each price. The sell five levels are usually in red, representing the five lowest ask prices, indicating the lowest prices sellers are willing to accept. For example, a bid price of 203.5 yuan with 971 lots indicates the highest bid in the market; an ask price of 204.0 yuan with 350 lots indicates the lowest ask.

Note that the Level 5 quote only shows the displayed orders, not necessarily executed trades, as orders can be canceled at any time.

What Does It Mean When External Volume Is Greater Than Internal Volume? Opportunities and Traps

What does it mean when external volume exceeds internal volume?

When external volume is greater than internal volume, it indicates that buyers are actively willing to pay higher prices to chase the stock, reflecting a bullish market sentiment. You can calculate the ratio of internal to external volume (internal volume ÷ external volume); a ratio less than 1, meaning external volume > internal volume, is generally considered a bullish signal.

However, the significance of external volume exceeding internal volume varies in different situations:

Scenario 1: External volume > internal volume and the stock price is rising with increased volume

This is the healthiest bullish signal, showing that buyers are actively entering and pushing the price higher, with strong short-term upward momentum. In this case, consider entering the market or adding positions.

Scenario 2: External volume > internal volume but the stock price is flat or declining

Caution is advised here. Large external volume without a price increase may indicate a “trap” — the main force (large traders) may be deliberately placing large buy orders to lure retail investors into selling, while secretly accumulating shares. If you observe that the bid orders (sell 1 to sell 3) keep increasing, followed by a sudden drop in price, it is a classic “buy trap” scenario.

Scenario 3: External volume > internal volume but trading volume fluctuates wildly

Unstable trading volume combined with external volume exceeding internal volume may suggest that the main force is creating a false appearance. Genuine bullish trends should show continuous buying pressure, not sudden surges followed by stagnation.

Combining Support and Resistance Zones for a Complete Trading Strategy

Relying solely on external volume being greater than internal volume is not precise enough; it should be combined with support zones and resistance zones for better judgment.

When external volume exceeds internal volume and the stock price is rising, if the price encounters a resistance zone, it indicates many traders may want to unload at that level. If buying power is sufficient to absorb these sell orders and break through the resistance, it confirms strong buying momentum, making the bullish signal more reliable.

Conversely, if external volume exceeds internal volume but the price only oscillates near support zones without breaking higher, the phenomenon may be short-term and not necessarily indicative of a sustained rally.

A recommended trading approach: Buy when the stock hits a support zone with external volume > internal volume, and sell when it reaches a resistance zone with internal volume > external volume.

Why Relying Solely on the Internal-External Volume Ratio Can Fail

Although external volume greater than internal volume reflects buyer activity, there are limitations:

Susceptible to manipulation by large players

Major traders can cycle through placing orders, executing trades, and canceling to artificially create a scenario where external volume exceeds internal volume, misleading retail traders.

Only reflects immediate trading behavior

The internal-external volume ratio shows real-time data but does not indicate long-term trends. Market sentiment, news, and fundamentals influence price movements, so a short-term external volume spike does not guarantee continued upward movement.

Needs to be combined with other indicators

The internal-external volume ratio should be used alongside trading volume, price position, technical analysis, and fundamental factors. Relying on it alone can lead to false signals.

Summary

External volume exceeding internal volume is an important indicator of market bullishness. When buyers actively pay higher prices (external volume > internal volume), it often signals high market optimism. However, this signal is not foolproof; it must be combined with price trends, volume, support/resistance zones, and fundamental analysis for more accurate judgment.

Remember: No single indicator guarantees success in financial investing. External volume surpassing internal volume is just one tool in technical analysis. True trading edge comes from multi-factor analysis and strict risk management. Learning to observe this phenomenon, along with understanding market psychology, can help you achieve better results in short-term trading.