Understanding the Meaning of Internal and External Orders in Stocks: From Basic Concepts to Trading Applications

In stock investing, many beginners see “internal volume” and “external volume” data when opening trading software, and often hear experienced investors discuss the “internal-external volume ratio.” What do these indicators actually tell us? Why are they so important? In fact, understanding the meaning of internal and external volume is equivalent to grasping the real-time mindset of market participants, helping you quickly judge short-term trends and capital flow.

Why Retail Investors Must Understand Internal and External Volume

Stock transactions don’t happen out of thin air; they result from buyers and sellers reaching a consensus at specific price levels. Once you understand the meaning of internal and external volume, you can interpret the urgency of market participants—are buyers more eager to enter, or are sellers rushing to exit? This is especially crucial for short-term traders. The meaning of internal and external volume reflects this market psychology, allowing you to seize opportunities ahead of other investors.

The Core Meaning of Internal and External Volume

To understand internal and external volume, first recognize the logic of “active buying” and “active selling.”

There are two types of orders in the market: sellers place “ask prices” at which they want to sell, and buyers place “bid prices” at which they want to buy. When investors want to execute trades immediately without waiting, they break this balance.

True meaning of internal volume: When a trade occurs at the “bid price,” it indicates that sellers are willing to sell at the buyer’s price actively. These trades are counted as internal volume. Internal volume reflects “seller urgency”—sellers are more aggressive, willing to lower prices to make a deal, often signaling a bearish trend.

True meaning of external volume: When a trade occurs at the “ask price,” it indicates that buyers are willing to pay higher prices actively. These trades are counted as external volume. External volume reflects “buyer urgency”—buyers are more aggressive, willing to chase higher prices, often signaling a bullish trend.

For example, in TSMC’s quote, suppose the bid is 1160 yuan/1415 shares, and the ask is 1165 yuan/281 shares. If an investor wants to sell immediately and places an order at 1160, executing 50 shares, this is a seller actively matching the bid, counted as internal volume. Conversely, if an investor wants to buy immediately at 1165, executing 30 shares, this is a buyer actively matching the ask, counted as external volume. These examples show that internal and external volume are not just cold numbers but expressions of real market sentiment.

How the Five-Order Price Levels Reveal Internal and External Volume Trends

When discussing internal and external volume, the “five-level order book” is an essential tool. It consists of the top five bid and ask prices, representing the most immediate buy and sell offers. Nearly every Taiwanese investor opening a broker app sees this as the first screen.

On the left are the “five bid levels” (usually shown in green), representing the top five highest bid prices and quantities. On the right are the “five ask levels” (usually in red), representing the lowest ask prices and quantities.

“Bid one” is the highest bid in the market; “ask one” is the lowest ask. The difference between them is called the “bid-ask spread.” It’s important to note that these levels show pending orders, not actual trades—orders can be canceled at any time, so the internal and external volume dynamics will adjust accordingly.

What the Internal-External Volume Ratio Indicates About Buying and Selling Power

Having understood internal and external volume, the next step is to learn how to calculate and use the “internal-external volume ratio.”

This ratio compares internal volume to external volume, serving as an indicator of buying and selling strength. The formula is:

Internal-External Volume Ratio = Internal Volume ÷ External Volume

Based on the ratio’s value, you can interpret market sentiment:

• Ratio > 1: Internal volume exceeds external volume, indicating high selling pressure and a bearish sentiment—sellers are eager to lower prices, a bearish signal.
• Ratio < 1: External volume exceeds internal volume, indicating bullish sentiment—buyers are eager to chase higher prices, a bullish signal.
• Ratio = 1: Equal buying and selling strength, market is in consolidation, direction is unclear; further signals are needed.

The ultimate goal of understanding internal and external volume is to quickly gauge market bias through this ratio. However, remember that this indicator alone isn’t sufficient, as markets are more complex than surface data.

Beware of False Signals: Traps of Inducing Buying or Selling

After mastering internal and external volume, investors often fall into the trap of over-relying on a single indicator. The market can produce scenarios that seem to align with internal and external volume logic but are actually deceptive.

“Fake bullish” trap: External volume exceeds internal volume, suggesting strong buying, but the price doesn’t rise—instead, it falls, with fluctuating volume. This could be a manipulation by big players who place large sell orders to lure retail investors into buying, while secretly offloading shares at the low. For example, a sideways price with external volume larger than internal, but with increasing sell orders, followed by a sudden drop, is a classic fake-out.

“Fake bearish” trap: Internal volume exceeds external volume, suggesting strong selling, but the price doesn’t fall—instead, it rises, with volume fluctuating. This indicates that big players are placing large buy orders to induce retail investors to sell, while secretly accumulating shares. For instance, a slight price increase with internal volume larger than external, but with accumulating buy orders, followed by continued rise, is a typical fake-out.

These traps remind us that understanding internal and external volume is just the first step. It must be combined with price position, volume changes, order book structure, and other factors for a comprehensive judgment.

Advanced Application: Combining Internal-External Volume with Support and Resistance Zones

True experts combine internal and external volume insights with technical analysis of “support” and “resistance” zones to make more robust trading decisions.

Using support zones: Although a larger internal volume suggests more selling pressure, if the price drops to a certain level but doesn’t go lower, it indicates strong buying interest at that level—forming a support zone. Within this zone, even with apparent selling pressure, the buying power can absorb the sell-off, making it a good area for bullish entries.

Using resistance zones: Conversely, if external volume exceeds internal volume but the price stalls at a certain high level, many investors might be trapped with losses after buying high. When the price rebounds, these trapped investors may sell to cut losses, creating strong selling pressure—forming a resistance zone. Despite bullish signals from internal and external volume, the selling pressure can prevent further rise or even reverse the trend.

Practical strategies:

• When a stock oscillates between support and resistance zones, buy near support and sell near resistance.
• If the price breaks below support, it indicates selling dominance and potential further decline.
• If the price breaks above resistance, it suggests strong buying momentum and potential for further gains.

Advantages and Limitations of Using Internal and External Volume as Trading Tools

Understanding internal and external volume offers several benefits:

Advantages:

• Real-time insight: Data updates instantly with trades, reflecting immediate buyer and seller activity—ideal for short-term trading.
• Simplicity: The concept is straightforward, making it accessible for beginners.
• Complementary analysis: When combined with order book data, volume, and technical analysis, it enhances short-term trend predictions.

Limitations:

• Potential manipulation: Large players can fake internal and external volume signals by placing and canceling orders to mislead retail traders.
• Short-term focus: It reflects only current trading activity, not long-term trends; market sentiment can be manipulated or misinterpreted.
• Need for multi-factor analysis: Relying solely on internal and external volume can lead to errors; it should be used alongside volume, price action, fundamentals, and other indicators.

Final Summary: Don’t Rely Solely on Internal and External Volume

In conclusion, internal and external volume are practical indicators for measuring the strength of buying and selling forces. Comparing these values helps quickly understand market sentiment: when internal volume exceeds external, it suggests sellers are eager to sell at bid prices, possibly leading to price declines; when external volume exceeds internal, buyers are eager to buy at ask prices, possibly pushing prices higher.

However, no single indicator can guarantee success. Internal and external volume are just tools within a broader analysis framework. Combining them with support and resistance levels, volume analysis, candlestick patterns, fundamental data, and market sentiment will provide a more complete picture, increasing your chances of successful trading.

Investors are advised to practice thoroughly in demo accounts to develop a practical understanding of internal and external volume before applying these insights in real markets.