Mastering the Secret of Internal and External Volume Ratios: A Must-Know Buying and Selling Momentum Indicator for Short-Term Trading

Many stock investors notice the “internal” and “external” volume data on their trading software interface when watching the market, and often hear discussions about the strength of the “internal/external volume ratio.” But what do these indicators actually represent? How can we truly understand the buying and selling forces in the market? In fact, mastering these indicators can help us quickly gain insights into short-term capital flows.

Viewing Buying and Selling Power from the Active Direction

Understanding internal and external volume hinges on distinguishing “who is actively executing trades.” In the stock market, each transaction is preceded by an order placement phase—sellers place “ask prices” hoping to raise the transaction price, while buyers place “bid prices” aiming to lower the transaction price.

When a stock’s transaction occurs at the bid price, this trade is counted as internal volume, indicating that sellers are more aggressive, actively matching the buyers’ quotes downward. This usually signals a bearish market sentiment, a bearish signal.

Conversely, if the transaction occurs at the ask price, it is recorded as external volume, meaning buyers are more eager, willing to pay higher prices to buy in. This often reflects a bullish market sentiment, a bullish signal.

For example: Suppose a stock has a bid of 1160 yuan/1415 lots, and an ask of 1165 yuan/281 lots. If an investor wants to sell immediately at 1160 (the bid price), this trade counts as internal volume. Conversely, if they want to buy immediately at 1165 (the ask price), it counts as external volume.

Composition and Significance of the Five-Price Level Quotes

Most investors open their brokerage app and see the five-price level quotes first, but many do not understand what the numbers mean. The five-price level quotes are composed of the order book from both buyers and sellers, showing the current five best bid and ask prices along with their respective quantities.

The green area on the left is the buy five levels, representing the top five bid prices and quantities; the red area on the right is the sell five levels, representing the top five ask prices and quantities. The difference between the best bid (buy one) and best ask (sell one) is known as the “bid-ask spread.”

It is important to note that these five levels only show the displayed willingness to buy or sell; these orders may not necessarily be executed, as traders can withdraw their orders at any time.

The Logic of Using the Internal/External Volume Ratio

Internal/External Volume Ratio = Internal Volume ÷ External Volume

This ratio intuitively reflects the strength of buying and selling forces in the market:

• Ratio > 1: Internal volume exceeds external volume, indicating sellers dominate, high bearish sentiment, a bearish signal.
• Ratio < 1: Internal volume is less than external volume, indicating buyers are in control, strong bullish sentiment, a bullish signal.
• Ratio = 1: Buying and selling forces are balanced, the market is in a stalemate or consolidation, with uncertain future direction.

However, relying solely on the internal/external volume ratio is not sufficiently accurate. In practice, it should be combined with the stock’s price position, volume changes, and order book structure for comprehensive analysis:

Healthy Bullish Signal: External volume > internal volume and the price is rising; if volume increases simultaneously, the short-term upward momentum is stronger.

Healthy Bearish Signal: Internal volume > external volume and the price is falling; if volume increases, the short-term downward pressure is more evident.

Caution — “Trap for Inducing Buying”: External volume > internal volume but the price is falling or moving sideways, with volatile volume. This may indicate that large sell orders are placed at the ask, misleading retail investors into chasing the price, while insiders continue to sell secretly. For example, during consolidation, external volume is significantly higher than internal, but buy orders at levels one to three are continuously increasing, followed by a sudden plunge.

Caution — “Trap for Inducing Selling”: Internal volume > external volume but the price is rising or sideways, with fluctuating volume. This suggests that large buy orders are being placed to lure retail investors into selling, while insiders are accumulating. For instance, during a slight rise, internal volume exceeds external, and buy orders at levels one to three keep increasing, eventually pushing the price higher.

Trading Strategies Based on Support and Resistance Zones

Internal and external volume data should be combined with support zones and resistance zones to improve success rates.

Formation of Support Zones: When the price drops to a certain level but cannot go lower, it indicates strong buying interest at that price—investors believe it is attractive and expect a rebound. This forms a support zone. Even if internal volume exceeds external volume, traders can consider going long at this level.

Formation of Resistance Zones: Conversely, when strong buying pressure fails to break through a certain price level and gets blocked, that becomes a resistance zone. Usually formed by previous buyers trapped at higher prices—when the price approaches, they want to sell to cut losses. As selling pressure increases, fewer buyers are willing to step in, making it difficult for the price to break through.

Practical Trading Tips:

• When the stock fluctuates between support and resistance zones, trade within the range: buy near support, sell near resistance.
• If the price breaks below support, it indicates insufficient buying to absorb selling pressure, often leading to a decline toward the next support zone.
• If the price breaks above resistance, it signals strong buying momentum, likely pushing the price higher toward the next resistance zone.

The Pros and Cons of Internal/External Volume Indicators

Advantages: Internal and external volume data update simultaneously with transactions, providing real-time insights. The concept is simple and easy to understand, allowing quick grasp without complex calculations. When combined with order book structure and volume analysis, it can significantly improve short-term trend judgment.

Limitations: Major players can manipulate signals through “placing orders → active transactions → canceling orders,” creating false signals. Relying solely on internal/external volume can be misleading. These indicators only reflect current transaction behavior and cannot determine long-term trends. Using them in isolation may lead to distortions; they should be combined with volume, technical analysis, and fundamental factors for higher accuracy.

Conclusion

The internal/external volume ratio is a quick tool to gauge the buying and selling forces in the market. When internal volume exceeds external volume, it indicates sellers are eager to offload at bid prices, increasing the probability of a price decline; when external volume exceeds internal volume, buyers are eager to buy at ask prices, increasing the chance of a price rise.

However, financial investing is never based on a single indicator. The internal/external volume ratio is just one part of technical analysis; it must be combined with company fundamentals, macroeconomic trends, and market sentiment. Only with thorough preparation can traders improve their success rate. It is recommended that investors practice repeatedly on simulation platforms to verify strategies in a virtual environment and accumulate practical experience.