Understanding Inner and Outer Market in One Article: The Key to Mastering Stock Buying and Selling Momentum

When opening securities trading software, have you ever been overwhelmed by all those dense data? Especially terms like “internal volume,” “external volume,” and “internal-external volume ratio”—they can sound unfamiliar at first. But actually, these data are secret weapons used by market experts to quickly assess buying and selling strength in the market. This article will guide you from zero to fully understand the meaning of internal and external volume, and how to use these data to make smarter investment decisions.

What Do Internal and External Volume Really Mean?

To understand internal and external volume, first clarify two key concepts in stock trading: who initiates the transaction and at what price level the transaction occurs.

Before a stock trade happens, the market shows the “bid price” (the highest price buyers are willing to pay) and the “ask price” (the lowest price sellers are willing to accept). These are unfilled orders that change every second. When someone decides to execute a trade immediately, the situation differs:

Internal Volume Meaning: When an investor wants to sell immediately, they place a sell order at the bid price (the highest buy order). If this order is filled immediately, the transaction is recorded as “internal volume.” This indicates the seller is eager, willing to lower the price to sell quickly. From market sentiment, an increase in internal volume usually suggests stronger selling pressure.

External Volume Meaning: When an investor wants to buy immediately, they place a buy order at the ask price (the lowest sell order). If this order is filled immediately, it is recorded as “external volume.” This indicates buyers are active, willing to pay more to buy quickly. An increase in external volume generally signals stronger buying momentum.

For example, using TSMC’s quote: suppose the bid side has 1,415 lots at 1160 yuan, and the ask side has 281 lots at 1165 yuan. If you sell 50 lots immediately at 1160 yuan, those are counted as internal volume; if you buy 30 lots immediately at 1165 yuan, those are counted as external volume.

In other words, internal and external volume fundamentally distinguish: who is more eager to match the other’s price.

How to Quickly Read the Level 5 Quote

Now that you understand the basic logic of internal and external volume, next is to learn about the “Level 5 quote”—the screen you see every day.

The Level 5 quote consists of internal and external volume, showing the top five bid prices and ask prices in real-time, along with the number of lots at each price. The left side, usually green, shows the top five bid levels (highest buy prices), and the right side, usually red, shows the top five ask levels (lowest sell prices).

For example, the best bid is 203.5 yuan with 971 lots; the best ask is 204.0 yuan with 350 lots. This indicates the highest bid in the market is 203.5 yuan, and the lowest ask is 204.0 yuan. The 0.5 yuan difference is called the “spread,” and trades often occur within this range.

Note that Level 5 quotes only show pending orders, not actual trades. Orders can be canceled at any time, so these numbers change instantly.

Market Psychology Behind Internal-External Volume Ratio

Once you can distinguish internal and external volume, the next step is to learn about the “internal-external volume ratio”—a key data point for short-term traders.

The ratio is simply: Internal Volume ÷ External Volume

Based on this ratio, you can gauge market sentiment:

• Ratio > 1 (internal volume exceeds external volume): indicates bearish sentiment, sellers are more aggressive, willing to lower prices, a bearish signal.
• Ratio < 1 (external volume exceeds internal volume): indicates bullish sentiment, buyers are more active, willing to pay higher prices, a bullish signal.
• Ratio ≈ 1 (volumes are roughly equal): market is balanced, direction is uncertain.

But remember: this ratio reflects current trading behavior and alone cannot determine the stock’s future direction.

What Happens When Internal > External or Vice Versa

In actual trading, you may encounter these common scenarios:

Scenario 1: External volume significantly larger than internal volume, stock price rises, and volume increases

This is the healthiest bullish signal. It shows buyers are more active, pushing the price higher, with increasing volume indicating high market participation. Short-term momentum is strong.

Scenario 2: Internal volume significantly larger than external volume, stock price falls, and volume increases

This is the healthiest bearish signal. Sellers are actively unloading, driving the price down, with volume rising. Short-term downward pressure is strong.

Scenario 3: External volume exceeds internal volume but the stock price stagnates or declines, with fluctuating volume

Beware of “false bullish” signals. This may be a manipulation by big players placing large sell orders to attract retail buyers, then secretly selling at higher prices. Features include sideways price movement, large ask volume, and accumulation of sell orders at the top, followed by a sudden drop.

Scenario 4: Internal volume exceeds external volume but the stock price stagnates or rises, with fluctuating volume

This is a “false bearish” pattern. Big players may be placing large buy orders to induce retail selling, while they accumulate shares at lower prices. Features include slight price increases, large bid volume, and accumulation of buy orders at the bottom, with the price continuing upward.

Understanding these scenarios requires not to rely on a single indicator. You should observe price, volume, order book structure, and market sentiment together to avoid being misled by big players.

Limitations and Risks of Internal-External Volume

While useful, internal and external volume have clear limitations:

Susceptible to manipulation: Big players can use “placing orders → executing trades → canceling orders” to create false internal/external volume data, misleading retail investors. Relying solely on this ratio can lead to wrong decisions.

Cannot determine long-term trend: Internal and external volume reflect only current trading behavior, not the stock’s medium- or long-term trend. Sometimes, internal volume may be high, but the stock still rises due to news, fundamentals, or market mood.

Single indicator risk: Using only internal-external volume ratio without considering volume, technical analysis, or fundamentals can significantly reduce accuracy.

Combining Support and Resistance Levels for a Complete Trading Strategy

To effectively use internal and external volume, combine it with technical analysis concepts like support zones and resistance zones.

In support zones—areas where the stock repeatedly bottoms but doesn’t break below—large buy orders often prevent further decline. Even if internal volume is high, the price may not fall further. In such cases, consider buying near support.

In resistance zones—areas where the stock repeatedly hits a ceiling—large sell orders at high prices can prevent further rise. Even if external volume is high, the price may struggle to break through. Consider shorting near resistance.

The basic logic: buy at support, sell at resistance. If the stock breaks below support or above resistance, the previous balance is broken, and a new trend may start, often leading to a one-sided move until the next support or resistance level.

Final Advice

Internal and external volume are important indicators to gauge the strength of buyers and sellers. Comparing their volumes helps quickly understand market dynamics. But remember:

• They are just one part of technical analysis.
• Combine with fundamentals, overall market conditions, and sentiment.
• Be cautious of manipulation and false signals.

Practice with simulated trading to experience how different internal-external volume ratios affect market behavior. There are no absolute rules in the stock market—only higher-probability trading principles. Keep this in mind, and your investing journey will be more stable.