Understanding the difference between internal and external trading and the key to judging stock buying and selling strength

When opening trading software, have you noticed those seemingly complex data—internal volume, external volume, and the ratio of internal to external volume? Many novice investors feel unfamiliar with these indicators but don’t realize they can directly reflect market buy and sell sentiment. Mastering the logic behind these indicators will significantly improve your ability to judge short-term stock price movements.

Manifestation of Buying and Selling Power: Understanding Internal and External Volume

In stock trading, there is always a game between buyers and sellers. The key to understanding internal and external volume lies in clarifying who is actively making concessions.

Before trade matching occurs, two types of orders appear in the market—sell orders at the asking price (hoping to raise the transaction price) and buy orders at the bid price (hoping to lower the transaction price). When a real transaction occurs, we can judge who is more aggressive based on the position of the transaction price.

Formation of Internal Volume: When the stock price transacts at the bid price, it indicates that sellers are unwilling to wait and directly accept the buyers’ bid. The number of shares sold in this transaction is counted into the internal volume, reflecting sellers’ urgency—they are willing to lower prices to sell, which is usually seen as a bearish signal.

Formation of External Volume: When the stock price transacts at the ask price, buyers actively chase the price and accept the higher asking price. The number of shares bought in this transaction is counted into the external volume, representing buyers’ proactive attitude—they are willing to pay more, which is a bullish signal.

For example, for a stock, if the bid side shows 1415 lots at 1160 yuan waiting to be bought, and the ask side shows 281 lots at 1165 yuan waiting to be sold. If an investor immediately sells 50 lots at 1160 yuan, it indicates they are actively matching the buyers’ bid, and these 50 lots are counted into the internal volume. Conversely, if an investor immediately buys 30 lots at 1165 yuan, they are accommodating the sellers’ ask, and these 30 lots are counted into the external volume.

The Significance of the Five-Level Quotes

The five-level quotes are the foundation of order book analysis, displaying the ten most willing-to-trade orders in the market. The left side (usually green) shows the top five highest bid prices, and the right side (usually red) shows the lowest five ask prices.

For example, if bid one shows 203.5 yuan / 971 lots, it means the highest current bid is 203.5 yuan with a willingness to buy 971 lots; if ask one shows 204.0 yuan / 350 lots, it indicates the lowest ask is 204.0 yuan with 350 lots available.

It’s important to note that the five-level quotes represent order intentions, not confirmed transactions—any order can be withdrawn at any time.

Quantifying Buying and Selling Power with Internal and External Volume Ratio

Short-term traders often focus on a core question: Who is mainly driving the current trading volume of this stock?

The internal to external volume ratio is a tool used to answer this question, with a straightforward calculation:

Internal/External Volume Ratio = Internal Volume ÷ External Volume

Based on this ratio, we can quickly judge market tendencies:

• Ratio > 1: Internal volume exceeds external volume, indicating selling pressure outweighs buying momentum, market sentiment is bearish, a sign of weakness.
• Ratio < 1: Internal volume is less than external volume, indicating strong buying interest, market sentiment is bullish, a sign of strength.
• Ratio ≈ 1: Buying and selling forces are balanced, the market is in stalemate or volatile, and the future direction is unclear.

Practical Application of Internal and External Volume Ratio

Knowing the definitions of internal and external volume alone isn’t enough; the key is how to combine this with other factors for judgment. Effective application should integrate stock price position, volume fluctuations, and order book structure:

Ideal scenarios of bullish and bearish coordination

When external volume significantly exceeds internal volume, and the stock price is rising, it indicates that buyers are actively pushing the price higher, showing healthy bullish behavior. If this is accompanied by a noticeable increase in volume, the short-term upward momentum will be even stronger.

Conversely, when internal volume greatly exceeds external volume, and the stock price is declining, it suggests sellers are actively unloading and driving the price down, a healthy bearish signal. If volume also increases during this decline, the downward pressure is even more substantial.

Beware of false signals

There are many deceptive signals in the market. When you see external volume far exceeding internal volume but the stock price is not rising—in fact, it’s falling—and volume fluctuates, it’s likely that the main players are creating a false bullish appearance. They may be stacking large sell orders at positions one to three to lure retail investors into chasing the rally, while secretly unloading shares—this is known as a “trap to induce buying.”

Similarly, if internal volume exceeds external volume but the stock price is not falling and is rising, with unstable volume, beware of a “trap to induce selling.” The main players may be placing large buy orders at positions one to three to lure retail investors into selling, while secretly accumulating shares. The stock price may then suddenly surge, trapping short sellers.

Another common phenomenon is when internal volume exceeds external volume, yet the stock price still rises. This is often because, besides trading volume, market psychology, news, and company fundamentals also influence the market.

Support and Resistance Zones

The core concept of technical analysis is to infer future trends through the interaction of price and volume. In this framework, support and resistance zones are crucial.

Formation and application of support zones

When internal volume exceeds external volume, it indicates sellers are more eager. However, when the price stops declining and fails to make new lows at a certain level, that level becomes a support zone. The existence of support suggests that at this price point, there is substantial buying interest—buyers believe the price is cheap and expect a rebound. Investors can consider entering long positions near the support zone, waiting for a rebound.

Formation and application of resistance zones

Conversely, when external volume exceeds internal volume, it indicates strong buying interest. When aggressive buying fails to push the price higher and encounters resistance at a certain level, that becomes a resistance zone. Resistance often forms near historical highs—investors who bought at high prices are reluctant to take losses or remain trapped. As the price approaches this level, they want to sell to cut losses. This heavy selling pressure prevents the price from rising further, regardless of buying strength.

Range trading strategies

Therefore, when a stock oscillates between support and resistance zones, traders can execute range-bound strategies: buy near support to go long, sell near resistance to take profit; or short near resistance, cover at support.

Once the stock breaks below support or surpasses resistance, these local buying and selling forces become insignificant, and a stronger trend usually follows—either a decline until the next support zone or a continued rise until hitting a new resistance zone.

Pros and Cons of Internal and External Volume

Advantages

Timely information updates: Internal and external volume data are updated simultaneously with each transaction, allowing the fastest reflection of active buy-sell changes in the market.

Low entry barrier: The logic behind internal and external volume is simple and clear, requiring no complex calculations, making it easy for beginners to understand.

Assists in order book analysis: Combining internal and external volume with bid-ask orders and volume data can significantly improve short-term price trend judgments.

Limitations and Risks

Susceptible to manipulation: As mentioned earlier, scenarios like “inducing buying” or “inducing selling” involve main players using order placement, execution, and cancellation cycles to create distorted internal and external volume data. Relying solely on this indicator can lead to wrong directions.

Only reflects short-term state: Internal and external volume depict current trading behavior but cannot reveal long-term trend directions or fundamental changes.

Isolated use is unreliable: Internal and external volume should be combined with volume, candlestick patterns, fundamental news, and other factors for comprehensive analysis. Using it in isolation greatly reduces its reference value.

Summary

Internal and external volume are essentially tools to measure the relative strength of market buyers and sellers. By observing the scale of internal versus external volume, investors can quickly understand who is more eager to trade—the sellers when internal volume is high, indicating higher risk of price decline; or the buyers when external volume is high, indicating higher probability of price rise.

However, successful investment decisions cannot rely on a single indicator. Internal and external volume ratio, support and resistance zones, and other tools are just parts of a comprehensive technical analysis toolkit. Savvy investors also consider the company’s fundamentals, industry trends, and macroeconomic environment to prepare thoroughly and improve their chances of success in the market.