Understanding the Main Force's Intent from Internal and External Orders: A Must-Know Order Book Analysis Technique for Short-Term Traders

When you open trading software, you’ve probably seen the bid (internal) and ask (external) data constantly fluctuating. Many people know they exist but don’t understand the true intentions behind these numbers. The bid and ask are not just cold figures; they reveal who is more eager to execute a trade, who is taking the initiative, and this information is crucial for short-term trading decisions.

Why Focus on Bid and Ask? The Truth About Market Buying and Selling Power

In order book analysis, the bid and ask are like the market’s “pulse,” and their movements reveal the market’s life or death.

The key to understanding these indicators is distinguishing between “主动买” (active buying) and “主动卖” (active selling). Before a trade occurs, sellers list their desired prices (ask prices), buyers list their willing prices (bid prices), both waiting. But when someone breaks this balance, actively crossing the spread to execute a trade, it creates either bid or ask volume.

When a trade occurs at the bid price, it means the seller has given up waiting and actively sold at a price below their ideal. These shares are counted as “internal” volume. A large internal volume indicates more people eager to sell than to buy, often signaling that the bears are in control.

When a trade occurs at the ask price, it means the buyer is unwilling to wait and is willing to pay a higher price immediately. These trades are counted as “external” volume. A large external volume suggests buyers are actively pushing forward, willing to pay more.

For example: TSMC’s first quote might show a bid of 1160 yuan for 1,415 shares and an ask of 1165 yuan for 281 shares. If an investor wants to sell immediately at 1160 and executes a 50-share deal, that volume counts as internal. Conversely, if someone wants to buy immediately at 1165 and executes a 30-share deal, that volume counts as external.

Order Book, Trades, and Active Buying/Selling: The Three Layers of Bid and Ask Interpretation

To truly read the order book, you need to understand bid and ask data on three levels.

First Layer: Order Book Quotes
The five best bid and ask prices show the market’s “waiting to sell” state. The five highest bid prices and quantities on the left, and the five lowest ask prices and quantities on the right. The difference between the best bid and best ask is called the “spread,” which is the stage where main players operate.

Second Layer: Real-Time Trades
When actual trades occur at bid or ask prices, internal and external volumes are generated. The side where the trade happens hints at who is actively driving the price. Short-term traders must monitor this data in real time, as it reflects the most genuine buying and selling intentions at that moment.

Third Layer: Psychological Battle
Large internal volume ≠ necessarily falling; large external volume ≠ necessarily rising. Behind this lies the strategy of the main players. They may deliberately pile orders at the ask levels (ask 1-3) to attract retail buyers (a long trap), or at bid levels (bid 1-3) to lure retail sellers (a short trap). Therefore, bid and ask data are surface phenomena; they must be combined with price trends and volume changes for comprehensive judgment.

The Hidden Secrets in the Five-Quote Display

The five-quote display essentially presents real-time internal and external volume data. It is not a prediction but a snapshot of current order placements.

Many beginners see large volume near bid 1 and think it’s a buying opportunity, but in reality, the five-quote only shows pending orders, not executed trades—orders can be canceled at any time. Main players exploit this by placing orders to attract attention, then executing trades unexpectedly.

The first step in reading the five-quote is observing order concentration: Is there an abnormal accumulation of orders at a certain level? Are orders rapidly increasing or decreasing within a period? These subtle changes reveal the main players’ next moves. When combined with actual trade data, you can infer whether the demand is real or just a false signal.

Practical Focus: The Psychological Battle Behind Bid-Ask Ratios

The ratio of internal to external volume = internal volume ÷ external volume. This simple formula determines the success or failure of many traders.

When ratio > 1 (internal volume > external volume), it indicates sellers are eager to offload, showing a bearish sentiment.

When ratio < 1 (internal volume < external volume), buyers are chasing prices, showing bullish strength.

When ratio ≈ 1, the market is in stalemate; the next move is uncertain, waiting for new signals.

However, beware of a common phenomenon: Normal bid-ask ratio but opposite price movement.

For example, a stock shows a large internal volume (more bid volume), suggesting a decline, but the price actually rises. In this case, check if there is a sudden accumulation of orders at bid 1–3. If yes, it might be a “false bear” trap set by the main players, deliberately showing large internal volume to scare retail investors into selling, while secretly accumulating shares. Once retail investors’ positions flow into the main players’ pockets, the price reverses upward.

Similarly, a large external volume with a stagnant or falling price could be a “false bull” setup, where main players are distributing shares at high levels.

This is why the bid-ask ratio alone cannot be used in isolation.

Beware of Traps: Fake Bulls and Fakes in Bid-Ask Data

Main players’ core tactics involve placing orders, executing trades, and then canceling orders.

Bull Trap Signals:
The stock consolidates, and external volume suddenly exceeds internal volume (appears bullish). Meanwhile, sell orders at levels 1–3 are densely stacked. Retailers see the large external volume and think “it’s going to rise,” so they buy at the ask. But after retail positions enter, main players quietly start selling, causing the price to fall. When retail investors realize it, they are trapped at high levels.

Bear Trap Signals:
The stock rises slightly, but internal volume exceeds external volume (appears bearish). Meanwhile, buy orders at levels 1–3 are densely stacked. Retailers think it’s a good exit point at high levels and sell at the bid. But main players are actually accumulating shares; after the buy orders are filled, the price continues upward, trapping retail investors again.

To detect these traps, incorporate time analysis: Are order placements rapidly increasing or decreasing? Are trades unusually concentrated? These anomalies are signs of main player manipulation.

Combining Support/Resistance and Bid-Ask Data: Building a Complete Analysis System

The true value of bid and ask data lies in combining it with support and resistance levels.

At Support Zones:
Even if internal volume exceeds external volume (seeming bearish), if the price hits a historical support level and doesn’t break below, it indicates strong buying interest. Traders can consider entering long positions expecting a rebound. Watch if external volume starts rising as confirmation.

At Resistance Zones:
Even if external volume exceeds internal volume (seeming bullish), if the price cannot break through a certain level despite strong buying, that level is a resistance. Be alert for fake bullish signals. Observe if volume increases but price stalls—this often indicates main players are distributing shares, and an imminent reversal may occur.

Trading Decision Workflow:

1. Price near support → check bid-ask ratio → if external volume rises, consider buying
2. Price near resistance → observe order book structure → if sell orders are dense, consider shorting
3. Volume fluctuates abnormally → beware of traps → wait for clearer signals

Limitations of Bid-Ask Indicators

While bid and ask data are powerful for short-term trading, they have clear limitations.

Advantages:

• Real-time updates synchronized with trades
• Simple concept, easy for beginners to grasp
• When combined with five-quote data and order book structure, can significantly improve short-term judgment

Disadvantages:

• Main players can fake orders and quickly cancel to manipulate data
• Only reflect current trading behavior, not long-term trends
• Market influences include sentiment, news, fundamentals; bid-ask data is just one piece

Therefore, the best approach is to use bid-ask data in conjunction with technical and fundamental analysis. Confirm short-term buy/sell signals with it, assess risk via fundamentals, and set stops with technical tools. Combining multiple dimensions increases success rate.

Conclusion

Bid and ask data are like the market’s “breath,” each trade telling the true intentions of buyers and sellers. Mastering this gives you the key to see through main players’ actions and avoid fake signals.

But remember, it’s just one key—not the entire set. True experts weave bid-ask data with five-quote analysis, volume, support/resistance, and fundamental insights into an intricate, robust trading network. The application boundary of bid-ask data is here—powerful, but not a standalone reason to act.

Practice continuously, develop intuition through real trading, and this will be the final step toward becoming a short-term trading master.