Does a higher foreign trading volume than domestic trading volume necessarily mean a stock price will fall? Master these 5 key judgment criteria

Many novice investors see the external volume (外盤) number higher than the internal volume (內盤) on the trading screen and often interpret this as a bullish sign, indicating active buyers and a potential rise in stock price. However, in reality, situations where external volume exceeds internal volume yet the stock price falls are quite common. What is the underlying logic behind this? The key issue is—you lack a complete set of judgment criteria. This article will deeply analyze the true meaning of internal and external volume, and how to identify genuine signals versus false traps in complex markets.

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

Before delving into why external volume greater than internal volume can coincide with falling prices, first understand what internal and external volume represent.

The core of internal and external volume lies in distinguishing who is actively driving the transaction. In the stock market, there are two situations: pending orders (orders waiting to be executed) and immediate transactions (orders that have been executed).

Imagine this scenario: sellers want to push the price higher by setting “ask prices,” while buyers want to lower the price by setting “bid prices.” When an investor hurriedly sells and executes at the bid price, this transaction is recorded as internal volume—indicating the seller actively conceding, willing to meet buyers at a lower price, often reflecting more selling pressure. Conversely, when an investor hurriedly buys and executes at the ask price, this is recorded as external volume—indicating the buyer actively chasing the price, willing to pay more, often reflecting more buying enthusiasm.

For example, TSMC’s quote: if the bid side shows 1160 yuan for 1,415 lots, and the ask side shows 1165 yuan for 281 lots, then if a trader quickly sells at 1160, 50 lots are internal volume; if a trader quickly buys at 1165, 30 lots are external volume.

Level 5 Quotes: The First Step to Understanding Market Depth

Open any stock trading software, and the five-level quote (五檔) is often the most visible. It shows the top five highest bid prices (usually in green) and the top five lowest ask prices (usually in red).

For example, the first level: bid at 203.5 yuan for 971 lots; ask at 204.0 yuan for 350 lots. This bid-ask spread reflects the short-term supply and demand balance.

Note that these five levels show pending orders, not executed volume. Since orders can be withdrawn at any time, relying solely on the five-level quote without observing actual trades can be misleading, as it may be manipulated by large players.

The Internal-External Volume Ratio: Understanding Trader Sentiment

Short-term traders focus on whether the transaction volume is on the internal or external side. Internal-External Volume Ratio = Internal Volume ÷ External Volume

Based on this ratio, we can quickly gauge market sentiment:

• Ratio > 1: Internal volume exceeds external volume, indicating sellers are more eager, market sentiment is bearish—bearish signal.
• Ratio < 1: External volume exceeds internal volume, indicating buyers are more eager, market sentiment is bullish—bullish signal.
• Ratio = 1: Balance between buyers and sellers, market is in stalemate, future direction uncertain.

However, it’s crucial to emphasize: the internal-external volume ratio alone is insufficient to determine the stock’s future price movement.

Beware of False Signals: External Volume Greater Than Internal Volume Yet Price Falls

This is why many investors get confused. When external volume exceeds internal volume, the logical expectation is that the price should rise. But in reality, the price may be falling. This phenomenon exposes an important market trap—false signals.

Scenario 1: The Trap to Induce Buying

Major players intentionally pile up large sell orders (say, at ask levels 1 to 3) to create a false impression of heavy selling pressure, attracting retail investors to chase the price up, forming external volume dominance. Meanwhile, the main players are actually unloading their holdings quietly. As a result, external volume appears large, but the stock price gradually declines or remains flat, even hitting limit down. This is a typical external volume greater than internal volume with falling prices scenario.

Identification method: observe whether trading volume fluctuates abnormally (sudden spikes or drops), and whether sell orders repeatedly pile up and then quickly disappear.

Scenario 2: Reverse Thinking

Sometimes, external volume is large, and the price is falling, but this indicates—market buying enthusiasm is insufficient to support the price. Although there are buyers chasing the price (forming external volume), the selling pressure is so strong that these buy orders cannot prevent the price from declining. In this case, external volume > internal volume and price drops because the quality of selling pressure exceeds buying power.

How to Correctly Judge: 5 Critical Dimensions

Relying solely on the internal-external volume ratio is inadequate. Investors should analyze from these five dimensions:

Dimension 1: Price Position
When external volume exceeds internal volume, check if the stock price is in an uptrend. If the price has already risen significantly, strong buying may be exhausted, and external volume dominance could signal a pullback.

Dimension 2: Volume Changes
Combine external volume dominance with increasing trading volume—a healthy bullish sign. If external volume is high but volume is shrinking or fluctuating abnormally, beware of false signals.

Dimension 3: Order Book Structure
Observe whether the ask side (sell orders) from level 1 to 5 has large pending orders but few actual trades. This indicates potential manipulation or fake selling pressure to lure buyers in.

Dimension 4: Support and Resistance Zones
When external volume exceeds internal volume and the price is falling, check if the price is near a resistance zone. If the stock hits a resistance level, inability to break through is normal, and subsequent decline is expected.

Dimension 5: Time Frame
The internal-external volume ratio reflects current trading behavior and is best suited for short-term analysis. Using it to predict long-term trends can be misleading. Combine with daily or weekly charts for more accurate judgment.

Practical Application of Support and Resistance Zones

The phenomenon of external volume exceeding internal volume with falling prices often occurs near resistance zones. Understanding support and resistance is key to avoiding traps.

Formation of Resistance Zones:
After a decline from a high, investors who bought at higher levels may be trapped and eager to sell to recover losses once the price approaches that level again. This accumulated selling creates a resistance zone. Even if buying enthusiasm is strong, these persistent sell orders can block the price, leading to external volume dominance with a falling price.

Reverse Logic at Support Zones:
When the stock drops to a support zone, previous buyers see the price as cheap and rush to buy, creating buying pressure. Even if internal volume exceeds external volume (a bearish sign), the price often rebounds due to strong support.

Practical Advice:
When external volume exceeds internal volume and the price falls, do not blindly chase the buy. Instead:

• Check if the price has reached a resistance zone; if so, lack of breakout is normal.
• Wait for the price to fall back to a support zone before considering entry.
• Avoid chasing high near resistance levels.

Common Traps for Beginners

The advantage of internal and external volume data is its immediacy and simplicity, providing quick insight into short-term trader sentiment. But the drawbacks are also evident:

• Susceptible to manipulation: Large players can craft fake signals through order placement, cancellation, and re-placing orders.
• Reflects only current sentiment: It does not predict long-term trends.
• Requires multi-angle analysis: Relying solely on internal-external volume ratios can mislead; combine with volume analysis, technical patterns, and fundamental data.

Many beginners feel confused and frustrated when external volume exceeds internal volume but the price declines. But in fact, this is the market teaching you—there is no perfect indicator, only incomplete analysis.

Conclusion: From Passive Observation to Active Judgment

Internal and external volume are tools to measure the urgency and mood of buyers and sellers. When external volume exceeds internal volume and the price falls, it does not mean the indicator is broken; rather, it reflects a more complex reality—resistance zones, false signals, or superior selling pressure.

The ideal decision-making process involves integrating internal-external volume ratios with other factors: technical position, volume quality, support/resistance levels, and fundamental support. Only when multiple signals align can your trading success truly improve.

To practice these principles, use simulated accounts to test your judgment criteria in a risk-free environment. The market is the best teacher, and real growth comes from deep understanding and continuous validation of complex phenomena.