What is the internal market? Understanding stock buying and selling momentum from the transaction principles

Many novice investors feel overwhelmed when opening trading software, as they are bombarded with a lot of data. Besides basic information like opening price, high, and low, they also see professional terms such as “internal volume,” “external volume,” and “internal-external volume ratio.” In fact, these seemingly complex indicators all tell a simple story — who is more eager to trade in the market. Understanding what internal volume means can help you quickly judge short-term capital flow and is the first step to becoming a market analysis expert.

How Are Internal and External Volumes Generated? Mastering the Logic of Active Transactions

To truly understand what internal volume indicates, you must first clarify the core issue of “who is driving the transactions” in the stock market. Before any trade occurs, there are two types of quotes — sellers want to push the price higher and place “ask prices,” while buyers want to lower the price and place “bid prices.” The difference between these two prices is called the “spread.”

When a stock trades at the bid price, it indicates that the seller is willing to accept the buyer’s quote, actively acknowledging a lower price and completing the trade directly. This transaction is recorded as internal volume, representing that the seller is more aggressive and eager to exit the market. From a market psychology perspective, this reflects that the seller is worried about further price declines and prefers to sell immediately at a lower price, signaling a bearish sentiment.

Conversely, when a stock trades at the ask price, it shows that the buyer is willing to pay a premium, actively accepting the seller’s quote at a higher price. This transaction is recorded as external volume, indicating that the buyer is more proactive and eager to enter the market. This usually suggests that buyers are optimistic about the future, expecting prices to continue rising, and is considered a bullish signal.

For example, in TSMC, suppose the current quotes are:

• Bid: 1160 yuan / 1,415 lots (1,415 lots want to buy at 1160 yuan)
• Ask: 1165 yuan / 350 lots (350 lots want to sell at 1165 yuan)

If an investor wants to sell 50 lots immediately, they will do so at 1160 yuan (the “best bid” price). Since the seller actively matches the buyer’s quote, these 50 lots are recorded as internal volume. Conversely, if an investor wants to buy 30 lots immediately, they will do so at 1165 yuan, which is the ask price, and this trade is recorded as external volume.

The Secrets Behind the Five-Level Quote

Many Taiwanese investors, upon opening their broker app, first see the five-level quote display, but few beginners understand its nuances. The five-level quote is composed of internal and external volumes, representing the top five bid and ask prices, along with the number of lots at each price. This display is essentially a dynamic “market demand map.”

On the left, the buy five levels (usually green) show the top five highest bid prices — representing the prices buyers are willing to pay, ranked from high to low. On the right, the sell five levels (usually red) show the lowest ask prices — representing the prices sellers are willing to accept, ranked from low to high.

For example, “Bid: 203.5 yuan / 971 lots” indicates that the most eager buyer is willing to buy at 203.5 yuan with 971 lots waiting; “Ask: 204.0 yuan / 350 lots” shows the most eager seller wants to sell at 204.0 yuan with 350 lots queued. The 0.5 yuan difference is called the “bid-ask spread.”

It’s important to note that all five levels display pending orders — orders that have not yet been executed. These orders can be canceled at any time, so the five-level quote is a constantly changing dynamic data set, not a guarantee of actual trades.

Practical Method: Using Internal Volume Ratio to Gauge Buying and Selling Power

Short-term investors care most about whether the main trading volume is in internal or external volume. This comparison is expressed as the internal-external volume ratio, calculated simply as:

Internal-External Volume Ratio = Internal Volume ÷ External Volume

Based on this ratio, you can quickly assess market buying and selling strength:

• Ratio > 1: Internal volume exceeds external volume, indicating more aggressive selling — a bearish signal.
• Ratio < 1: Internal volume is less than external volume, indicating more aggressive buying — a bullish signal.
• Ratio = 1: Equal buying and selling pressure, market is in a stalemate or consolidation, and the future direction is uncertain. More signals are needed.

However, the internal-external volume ratio alone does not tell you whether the stock price will rise or fall. The key is to combine this ratio with price movements, trading volume, and order book structure for comprehensive analysis.

Five Warning Signs of Market Manipulation of Internal Volume by Major Players

In practice, big players often manipulate internal and external volume data to mislead retail investors — a trap that beginners are most prone to fall into. Recognizing these tactics can help you avoid becoming a “bagholder.”

Warning Sign 1: Fake Bullishness
When external volume is significantly larger than internal volume, making it look like the bulls are in control, but the price remains stagnant or consolidates, with fluctuating and unstable volume. This may indicate that the main force is placing large sell orders at levels like ask 1 to ask 3, pretending to sell to attract retail buyers. In reality, they are quietly offloading shares, and the price may suddenly plunge.

Warning Sign 2: Fake Bearishness
Conversely, when internal volume exceeds external volume, suggesting dominance by sellers, but the price does not decline and instead moves slightly higher, with unstable volume. This could mean the main force is stacking large buy orders at bid 1 to bid 3, creating a false impression of buying interest, luring retail investors to sell. Once retail investors have sold out, the main force cancels orders and absorbs the shares, pushing the price higher.

Warning Sign 3: Discrepancy Between Orders and Trades
If you observe that a stock has a large number of pending orders but very little actual trading volume, it often indicates that the main force is creating “fake buying power” or “fake selling pressure” to influence retail judgment.

Warning Sign 4: Rapid Order Cancellation
If you notice that certain orders at specific prices suddenly disappear, it suggests someone is trying to create false market signals and quickly retracts the orders — a typical manipulation tactic.

Warning Sign 5: Divergence Between Internal-External Ratio and Price Trend
When internal volume is significantly larger than external volume, but the price continues to rise; or when external volume dominates but the price keeps falling. Such divergence indicates possible manipulation of internal and external data or the influence of other factors like major news or fundamental changes.

Combining Support/Resistance Zones with Internal Volume for Trading Strategies

Technical analysis not only involves observing the internal-external volume ratio but also incorporates support and resistance zones — key levels for entry and exit.

Support Zone and Internal Volume:
Although a large internal volume indicates more aggressive sellers, when the price drops to a certain level and fails to go lower, it suggests many investors see this price as cheap and are willing to buy, forming a support zone. These buyers expect a rebound, so when internal volume and support coincide, it signals a potential bullish reversal.

Resistance Zone and External Volume:
If external volume exceeds internal volume, indicating strong buying interest, but the price stalls at a certain level, this is a resistance zone. Investors who bought near the high may be reluctant to sell at a loss, but once the price approaches this level, they may rush to sell, creating selling pressure. When this resistance is confirmed, it can turn into a barrier for further upward movement.

Practical Trading Tips:

• When the stock is within support or resistance zones, consider swing trading: buy near support, sell near resistance.
• Alternatively, when the price reaches resistance zones, consider shorting; when it hits support, consider going long.
• If the price breaks below support or above resistance, it indicates a significant change in supply and demand, often leading to a new trend.

Pros and Cons of Internal Volume Indicators

Internal volume indicators are not perfect tools. Understanding their advantages and limitations helps you use them more rationally.

Advantages:

• Real-time Data — Internal volume updates instantly with trades, reflecting the active buying and selling behavior without delay.
• Easy to Understand — The concept is simple, making it accessible for beginners.
• Complementary to Order Book Analysis — When combined with order book data and trading volume, it can significantly improve short-term trend judgment.

Disadvantages:

• Susceptible to Manipulation — As previously described, big players can create fake internal/external volume signals through order placement and cancellation.
• Short-term Focus — Internal volume reflects immediate trading behavior and is mainly useful for short-term analysis, not long-term trend prediction.
• Potential for Misinterpretation — Relying solely on internal volume without considering other factors like price action, volume, and fundamentals can lead to errors.

Smart investors should treat internal volume ratios as auxiliary tools rather than sole decision-makers.

Summary: What Is Internal Volume and How to Use It Effectively

Internal volume essentially measures the strength of buying and selling forces in the market. By comparing internal and external volumes, investors can quickly gauge the urgency and sentiment of market participants.

• When internal volume exceeds external volume, it indicates sellers are eager to sell at bid prices, signaling potential downside — a bearish sign.
• When external volume exceeds internal volume, it suggests buyers are eager to buy at ask prices, indicating potential upside — a bullish sign.

However, no single indicator guarantees success. Internal-external volume ratios, support/resistance zones, and other technical tools should be combined with fundamental analysis and macroeconomic insights. Only by integrating technical, fundamental, and market perspectives can your investment decisions become more robust and reliable.