Understanding the Level 5 quotes to read the internal and external orders: A complete guide to stock buying and selling momentum

Whenever you open a brokerage app to view the market, the five-level quote screen comes into view—the green numbers on the left represent the bid prices, and the red numbers on the right represent the ask prices. But what do these numbers truly mean? What market stories are hidden behind them? In fact, understanding the structure of the five-level quotes is equivalent to mastering two commonly discussed yet easily confused indicators: the internal and external trading volumes. This article will guide you step by step, starting from how to read the five levels, delving into the logic behind internal and external volumes, and ultimately teaching you how to apply this knowledge in practical trading.

The Structure of the Five-Level Quote: Confrontation Between Buyers and Sellers

What is the five-level quote?

The five-level quote is the most basic and intuitive order book tool in the stock market. It displays the top five bid prices and the top five ask prices, along with the corresponding order quantities at each price level.

Five Bids (usually shown in green): Represents the top five buy orders with the highest prices, reflecting the prices and quantities buyers are willing to pay.

Five Asks (usually shown in red): Represents the top five sell orders with the lowest prices, reflecting the prices and quantities sellers are willing to sell at.

For example, suppose the first line shows bid one (203.5 yuan / 971 shares), indicating the highest bid in the market is 203.5 yuan with an order volume of 971 shares; ask one (204.0 yuan / 350 shares) indicates the lowest ask price is 204.0 yuan with 350 shares for sale. The difference between 203.5 and 204.0 yuan is called the spread or bid-ask spread.

It’s important to note that the five-level quote only shows the displayed orders; these order quantities do not necessarily execute immediately, as traders can withdraw their orders at any time.

How to read the five-level quote: difference between pending orders and actual transactions

Many novice investors easily confuse the concept— the five-level quote shows pending orders, not the actual executed volume. Pending orders are traders’ intentions for future trades; actual transactions are the trades that have been completed.

Understanding this distinction is crucial. When you see ask one with 500 shares, it doesn’t mean these 500 shares will definitely be bought; similarly, seeing bid one with 800 shares doesn’t guarantee those shares will be purchased. The market is constantly changing, and pending orders are adjusted with price movements.

Internal and External Volumes: Who Drives the Transactions?

The logic of active buying and selling

To understand internal and external volumes, first, clarify who initiates the transactions. In stock trading, one side will always compromise to complete a deal.

Before a trade, sellers aim to raise the price by placing “ask” orders; buyers aim to lower the price by placing “bid” orders. When prices agree, a transaction occurs. But who makes the first move?

The meaning of internal volume

When the stock price “transacts at the bid price,” it indicates that the seller is willing to accept the bid price already posted by the buyer, actively accommodating the buyer’s quote. The volume of such transactions is called internal volume.

What does this imply? Sellers are eager to sell at relatively lower prices, showing higher seller activity. From market sentiment, this often indicates a bearish signal, as the selling pressure is strong.

For example: suppose the bid side shows 1160 yuan / 1415 shares, and the ask side shows 1165 yuan / 281 shares. An investor wants to sell immediately, placing an order at 1160 yuan (the bid price), and a transaction of 50 shares occurs. These 50 shares are counted as internal volume, representing sellers’ active concessions.

The meaning of external volume

Conversely, when the stock price “transacts at the ask price,” it indicates that buyers are willing to accept the ask price already posted by sellers, and the volume of such transactions is called external volume.

This suggests that buying activity is stronger, with buyers actively chasing the price. Market interpretation usually considers this a bullish signal.

Continuing the previous example: an investor wants to buy immediately, placing an order at 1165 yuan, and a transaction of 30 shares occurs. These 30 shares are counted as external volume, indicating buyers’ active pursuit.

Calculating and Applying the Internal-External Volume Ratio

The formula and meaning of the internal-external volume ratio

The internal-external volume ratio is an important indicator to measure the strength of buying and selling forces in the market. Its calculation is straightforward:

Internal-External Volume Ratio = Internal Volume ÷ External Volume

Based on the result, conclusions can be drawn:

• Ratio > 1: Internal volume exceeds external volume, indicating increasing bearish sentiment, with sellers more eager to sell, a bearish signal.
• Ratio < 1: Internal volume is less than external volume, indicating increasing bullish sentiment, with buyers more eager to chase prices, a bullish signal.
• Ratio = 1: Buying and selling forces are balanced, the market is in stalemate or consolidation, and the future direction is uncertain; further signals are needed.

Practical scenarios

The true value of the internal-external volume ratio lies in comprehensive analysis with other factors. Relying solely on this ratio can be misleading, but when combined with price position, volume, order book structure, etc., it can improve prediction accuracy.

Scenario 1: External volume > Internal volume and price rising

This is the most ideal bullish signal. Buyers are actively entering the market and successfully pushing up the price, showing strong buying power. If accompanied by increasing volume, the short-term upward momentum is even stronger.

Scenario 2: Internal volume > External volume and price falling

This is a typical bearish signal. Sellers actively sell and successfully depress the price, establishing a weak market. If volume also increases, downward pressure intensifies.

Scenario 3: External volume > Internal volume but price does not rise but falls, with volume fluctuating

This situation warrants caution, as it may be a “false bullish” signal. Major players might be placing large buy orders to attract retail follow-up but secretly distributing shares. The stock may move sideways or slightly decline, with external volume larger than internal, but ask prices (ask one to ask three) keep increasing, followed by a sudden plunge.

Scenario 4: Internal volume > External volume but price does not fall but rises, with volume fluctuating

This could be a “false bearish” signal. Major players might be placing large sell orders to create panic and lure retail investors to sell, while secretly accumulating shares. The stock may slightly rise, with internal volume larger than external, but bid prices (bid one to bid three) keep piling up, and the stock continues to climb.

Why can the internal-external volume ratio sometimes become invalid?

It should be noted that there are cases where internal volume exceeds external volume but the price still rises afterward. This is because stock price movements are influenced not only by transaction volume but also by market sentiment, major news, fundamental changes, and other factors. Therefore, the internal-external volume ratio is just one part of technical analysis and should not be relied upon solely.

Combining Internal-External Volume with Support and Resistance Zones

Formation and operation logic of support zones

Although internal volume > external volume indicates sellers are more eager to trade, when the stock price falls to a certain level and begins to stabilize, it shows that many buyers are willing to enter at that price, believing it to be cheap. This price range is called a support zone.

Support zones are usually formed because many investors previously bought at that level, expecting the price to rise in the future. When the price reaches this zone, these potential buyers gather, creating strong support. Traders can consider buying in the support zone, expecting a rebound.

Formation and operation logic of resistance zones

Conversely, when external volume > internal volume indicates strong buying interest, but the price cannot break through a certain level, that level becomes a resistance zone.

Resistance zones are often formed by investors who bought at high prices earlier. After buying in that area, they face losses or small profits. When the price approaches that level again, they are eager to sell to cut losses or take profits, creating heavy selling pressure. This supply prevents the price from rising further, causing it to stall or reverse.

Zone-based trading strategies

Based on these principles, classic technical analysis includes zone-based trading strategies:

• When the stock fluctuates within support and resistance zones:

  • Buy near support zones (long positions)
  • Sell or short near resistance zones (short positions or reduce holdings)

• When the stock breaks through a zone:

  • If it breaks below support, it often indicates insufficient buying power, and the stock may decline until a new support is found.
  • If it breaks above resistance, it indicates strong buying momentum, and the stock may continue rising until encountering new resistance.

Mastering the combined application of support/resistance zones and internal-external volume can significantly improve short-term trading success.

Advantages and Disadvantages of the Internal-External Volume Indicator

Main advantages of internal-external volume

• Real-time: Data updates simultaneously with intraday transactions, reflecting the current active buying and selling intensity.
• Easy to understand: The concept is straightforward and intuitive; even beginners can grasp the basic logic without complex calculations.
• Effective as a supplementary tool: When combined with order book structure, volume, and technical patterns, it can enhance short-term trend judgment.

Main disadvantages of internal-external volume

• Susceptible to manipulation: Major players can artificially create internal and external volume data through “placing orders, executing trades, and withdrawing orders.” Relying solely on this ratio can lead to traps.
• Limited to immediate snapshot: It reflects only the current moment’s trading behavior and has limited value for long-term trend analysis.
• Requires multiple indicators: Using only the internal-external volume ratio can be misleading; it must be combined with volume, technical analysis, fundamental data, and other factors for more reliable conclusions.

A Complete Framework for Investment Decisions

In actual trading, the internal-external volume ratio is just one tool in the technical analysis toolbox and should not be the sole basis for decisions. A comprehensive investment approach should include:

• Technical analysis: Combining internal-external volume, order book, support/resistance, volume, and chart patterns.
• Fundamental analysis: Monitoring company financials, industry outlook, competitive advantages.
• Market sentiment: Observing major players’ movements, retail investor psychology, margin balances.
• Macroeconomic factors: Considering overall market liquidity, policy impacts, economic data.

Only by integrating these dimensions can investors improve decision accuracy and success rate. The internal-external volume ratio is indeed a quick way to gauge current market buying and selling strength, but always remember: never rely solely on a single indicator—this is the most valuable experience in practical investing.