How to interpret internal and external trading volumes? A must-know guide for investors to analyze buying and selling momentum

Open your trading software, and a bunch of data will pop up—opening price, high, low… and also a item that confuses many beginners: internal and external volume. Many investors have heard of the “internal vs. external volume ratio,” but they never quite understand what it’s measuring. Actually, how to interpret internal and external volume isn’t complicated. Its core is to quickly judge, through buying and selling activity, who is more eager—buyers or sellers—and then predict short-term stock price movements.

Quick Guide to Internal and External Volume: 2 Minutes to Understand Who’s Driving the Price

To understand how to read internal and external volume, first grasp a simple logic: Who initiates the trade?

In the stock market, before any transaction, there are two quote states. Sellers place “ask prices” (hoping to sell higher), buyers place “bid prices” (hoping to buy lower). These two prices form a price range.

When a trade occurs at the bid price, it indicates someone is willing to buy at that price, meaning sellers are more eager—they’re willing to meet the buyer’s offer—this transaction is recorded as internal volume. The more eager the sellers, the larger the internal volume, indicating a bearish sentiment.

Conversely, if the trade happens at the ask price, it shows someone is willing to sell at that price, meaning buyers are more aggressive—they’re willing to chase higher prices—this transaction is recorded as external volume. The more eager the buyers, the larger the external volume, indicating bullish sentiment.

For example, TSMC’s current quotes might be:

• Bid: 1160 yuan / 1,415 shares (someone wants to buy at 1160 yuan for 1,415 shares)
• Ask: 1165 yuan / 281 shares (someone wants to sell at 1165 yuan for 281 shares)

If you want to sell 50 shares immediately at 1160 yuan, your order matches the bid price, and the 50 shares are counted as internal volume.

If you want to buy 30 shares immediately at 1165 yuan, your order matches the ask price, and the 30 shares are counted as external volume.

The Hidden Message in the Top 5 Price Levels

Every time you open your broker app, the most prominent feature is the five-level order book. It shows the top five bid prices (usually green) and the top five ask prices (usually red), along with the corresponding order sizes.

For example:

• Bid 1: 203.5 yuan / 971 shares (highest bid)
• Ask 1: 204.0 yuan / 350 shares (lowest ask)

The spread between bid 1 and ask 1 is called the “bid-ask spread.” The narrower the spread, the better the liquidity. Important reminder: The five-level order book only shows pending orders; it does not guarantee that these orders will be executed—they can be canceled at any time.

Practical Use of Internal and External Volume Ratios: How to Tell Real Bullishness from Fake

The advanced way to interpret internal and external volume is to observe the internal vs. external volume ratio. The calculation is simple:

Internal/External Volume Ratio = Internal Volume ÷ External Volume

• Ratio > 1: Internal volume exceeds external volume, indicating sellers are eager to push prices down—bearish signal
• Ratio < 1: External volume exceeds internal volume, indicating buyers are actively chasing prices—bullish signal
• Ratio = 1: Buying and selling forces are balanced, market is consolidating

But the key to using the internal/external volume ratio is to combine it with price movement to judge whether the signals are genuine.

True signals look like:

• External volume > Internal volume + Price Rising: Buyers are actively entering the market to push prices higher—healthy bullish force. Larger volume confirms strength.
• Internal volume > External volume + Price Falling: Sellers are actively unloading, pushing prices down—healthy bearish force.

Beware of false signals:

If you see external volume > internal volume but the price doesn’t rise or even falls, especially with fluctuating volume, beware of being lured into a trap. Major players might be placing high sell orders to create the illusion of selling pressure, enticing retail investors to chase the high. In reality, they are quietly offloading. Typical signs include: sideways price movement, external volume significantly larger than internal, but ask orders (sell orders) piling up at the top, followed by a sudden plunge.

Similarly, internal volume > external volume but the price doesn’t fall—instead, it rises—may be a fake bearish signal. Major players might be placing buy orders to create a “strong buying” illusion, luring retail investors to sell. For example, the price slightly rises, internal volume exceeds external, but buy orders at the top keep stacking, and the price continues upward.

This is why relying solely on the internal/external volume ratio is risky—market conditions are also influenced by news, capital flows, and market sentiment.

The Logic of Support and Resistance Zones with Internal and External Volume

Advanced investors often combine internal/external volume with technical analysis. Support zones are price levels where the stock tends not to fall further after dropping—usually because buyers find the price attractive and step in. When the price hits a support zone, internal volume often shrinks (buying is steady), and the price tends to rebound.

Resistance zones are levels where upward movement is halted. Often, investors who bought at high prices want to exit, creating selling pressure. When the price approaches resistance, external volume tends to be limited (selling is heavy), and the price faces resistance.

Practical strategy:

• When the price is within support/resistance zones, consider buying near support and selling near resistance.
• If the price breaks below support or above resistance, it indicates a shift in market forces, often leading to a new trend until the next support or resistance level.

Three Major Traps in Using Internal and External Volume Indicators

Trap 1: Manipulation by Major Players
Major players can use “placing orders → executing → canceling” cycles to create fake internal/external volume data. Relying solely on these can lead to wrong judgments.

Trap 2: Short-term Limitation
Internal and external volume only reflect immediate trading activity. They cannot predict long-term trends. A large internal volume in one hour doesn’t mean the entire day will fall.

Trap 3: Distortion in Low Liquidity Stocks
In stocks with low liquidity, internal and external volume data can fluctuate wildly, making them unreliable. Always combine with volume, technical, and fundamental analysis for better accuracy.

Multiple Indicators Are the Key to Success

The ultimate answer to how to interpret internal and external volume is: Never rely on a single indicator.

A comprehensive market analysis should include:

1. Internal/External Volume Ratio: gauge current buying/selling strength
2. Price Trend Confirmation: use candlestick patterns to verify signals
3. Volume Analysis: check if volume is expanding or contracting
4. Order Book Structure: observe if sell orders are piling up or buy orders are accumulating
5. Technical Analysis: support/resistance, moving averages, indicators like RSI, MACD
6. Fundamental Factors: company earnings, industry news, macroeconomic environment

Only when all these signals align can your trading decisions be more confident.

In financial investing, there’s no single “savior” indicator. Internal and external volume are just tools among many. The most important skill is cultivating multi-dimensional thinking—simultaneously observing price, volume, capital flow, sentiment, and fundamentals—to truly understand what the market is telling you.

If you want to practice these skills, use a demo platform with virtual funds to repeatedly simulate trades. When you can quickly switch between internal/external volume, support/resistance, and volume signals, and find consistent clues, you’re close to stable profits.