Understand the operation of internal and external markets, and master the buy and sell signals on stock order books

Are you seeing “internal volume” and “external volume” data on your trading software but don’t know what they mean? Do you often hear investors discuss the “internal vs. external volume ratio” but find it confusing? Actually, these data are hidden inside the brokerage app you open every day. They reflect the most genuine changes in market sentiment from both buyers and sellers. Learning to interpret internal volume allows you to see through short-term capital movements in advance.

Why Should You Pay Attention to Internal Volume? Starting from the Logic of Orders and Transactions

Every trade in the stock market follows a basic logic: placing orders waiting to be filled and active transactions. When you open the market software, the top five bid and ask prices are the order queues in the market, waiting for someone to execute. But the key question is—who is eager to complete the trade?

How do sellers who want to unload quickly do it? They won’t wait for buyers to raise the price slowly; instead, they sell directly at the bid price (the price buyers are willing to pay), executing quickly. If buyers are eager to enter the market, they will buy at the ask price (the price sellers are willing to accept), even chasing higher prices. This “who actively compromises” behavior is recorded in the internal and external volume data.

In simple terms:

• Internal volume records sellers who don’t want to wait—they accept the buyer’s terms proactively.
• External volume records eager buyers who actively chase the price.

How to Judge Internal vs. External Volume: Who Is Driving the Price Up or Down

Let’s use a real example. Suppose TSMC’s order book looks like this:

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

Internal volume scenario: An investor wants to sell immediately, directly at 1160 (bid price), executing 50 shares. Since the seller actively accepts the buyer’s price, these 50 shares are counted as internal volume. An increase in internal volume indicates selling pressure, a bearish signal.

External volume scenario: An investor wants to buy immediately, directly at 1165 (ask price), executing 30 shares. The buyer actively pays a higher price, counted as external volume. An increase in external volume indicates strong buying interest, a bullish signal.

This is the fundamental difference between internal and external volume—internal reflects sellers’ urgency, external reflects buyers’ eagerness.

How to Read the Five-Price Quote? Interpreting the Order Book Structure

Open your brokerage app, and the most prominent feature is the five-price quote. Don’t underestimate this table; it tells you what the waiting order queue looks like.

The five-price quote is divided into two sides:

• Left side (usually green): Top 5 bid orders, showing the highest bid prices and quantities
• Right side (usually red): Top 5 ask orders, showing the lowest ask prices and quantities

For example:

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

This indicates a 0.5 yuan spread, representing the space where no transaction has occurred yet, waiting for a match.

Important reminder: The five-price quote only shows pending orders, not executed trades. Market participants can cancel orders at any time, so seemingly stable order books can vanish instantly. This is why market makers often use “fake orders” to mislead retail investors.

What If Internal Volume Is Greater Than External Volume? Calculating the Internal-External Ratio to Judge Market Sentiment

Now, let’s quantify the buying and selling strength. The internal vs. external volume ratio measures the market’s bullish or bearish momentum.

Calculation: Internal-External Ratio = Internal Volume ÷ External Volume

Based on this ratio, we can interpret market sentiment:

Ratio > 1 (internal volume exceeds external volume)

• Market sentiment is bearish, sellers are eager to sell at lower prices
• Bearish signal, downward pressure on the stock

Ratio < 1 (internal volume less than external volume)

• Market sentiment is bullish, buyers are chasing prices
• Bullish signal, upward momentum

Ratio ≈ 1 (internal and external volumes are similar)

• Market is in a stalemate, no clear trend
• Price may fluctuate, direction is uncertain; wait for stronger signals

However, there’s a trap: Relying solely on the ratio can be misleading. Further explanation will follow.

Can Internal Volume Data Be Faked? Recognizing the “Trap” of Manipulators’ “Fake Buying” and “Fake Selling”

This is a common pitfall for beginners. Savvy market manipulators know that investors watch the internal vs. external volume ratio, so they start creating false signals.

Fake Bullish Trap (external volume > internal volume but price drops):

• The manipulator piles large buy orders at levels 1-3, creating a false impression of strong buying interest, enticing retail investors to chase the price up
• In reality, the manipulator is quietly selling large lots behind the scenes
• The price seems to rise, then suddenly plunges

Fake Bearish Trap (internal volume > external volume but price rises):

• The manipulator places large sell orders at levels 1-3, creating a false impression of selling pressure, enticing retail investors to sell
• In reality, the manipulator is accumulating shares secretly
• The price appears to fall, then suddenly rebounds

How to identify? Observe the stability and speed of order changes. Genuine orders tend to be relatively stable and change slowly; fake orders often fluctuate rapidly, appearing and disappearing.

Combining Support and Resistance Zones for More Accurate Internal Volume Analysis

Relying solely on the internal vs. external volume ratio is risky. It’s better to combine it with support and resistance zones for comprehensive analysis.

Support zone logic:

• When the stock price drops to a certain level and does not go lower, it indicates strong buying interest at that level—many investors believe “it’s cheap here” and expect a rebound.
• If internal volume exceeds external volume but the price stays near support, it could be a sign of main players accumulating shares, not necessarily bearish.

Resistance zone logic:

• When the stock rises to a certain level and cannot go higher, it indicates many sellers are willing to unload at that price—possibly investors trying to cut losses.
• If external volume exceeds internal volume but the price is blocked at resistance, it could be a sign of manipulators inducing buying.

Practical strategy:

• Buy near support zones: Confirm with internal vs. external volume to judge the strength of buyers
• Sell near resistance zones: Be cautious even if external volume looks strong
• Break below support or above resistance: Indicates trend reversal; the trend may continue until the next support or resistance

Advantages and Limitations of Internal Volume Analysis

Advantages:

• Real-time data: Internal volume updates instantly with transactions, providing quick signals
• Easy to understand: Simple concept suitable for beginners
• Market insight: When combined with order book structure and volume, helps gauge short-term trend

Limitations:

• Manipulation risk: Manipulators can fake signals with fake orders and rapid cancellations
• Short-term focus: Only reflects current trading behavior, not long-term trend
• Misleading if used alone: Should be combined with volume, technical, and fundamental analysis to reduce errors

Internal volume is not a magic bullet; it’s a puzzle piece.

Final Advice: Don’t Rely Solely on Internal Volume; Incorporate Fundamentals

The most common mistake in investing is over-relying on a single indicator.

Internal vs. external volume, support/resistance zones are tools for short-term market sentiment. They cannot predict a company’s long-term value. Ultimately, a stock’s rise or fall depends on:

• Fundamentals: Profitability, growth prospects, industry position
• Macroeconomics: Interest rates, inflation, economic cycles
• Policy factors: Industry regulations, government policies, monetary policy

A stock showing many internal volume signals and bearish signs might suddenly reverse due to positive company news. Conversely, a seemingly strong buy signal can turn bearish.

To truly improve your investment success rate, consider:

1. Use internal volume to identify short-term entry and exit points; avoid holding onto positions blindly
2. Regularly review company fundamentals and industry developments
3. Practice on demo accounts, such as Mitrade’s $50,000 virtual funds, to experience real-time market dynamics
4. Combine with other technical indicators (Bollinger Bands, RSI, etc.) for cross-verification

Internal volume is your eyes; fundamentals are your judgment. What you see might be illusions. Only by combining rational analysis can you survive longer in the investment jungle.