Deepen your understanding of the meaning of internal and external markets — the key indicator to grasp the buying and selling momentum in the stock market

When you open your brokerage trading software, besides stock price fluctuations and trading volume, the first data that often catches your eye are those you might not fully understand yet: internal volume, external volume, and the frequently mentioned “internal-external volume ratio.” These indicators may look complicated, but they are actually windows into understanding the market participants’ buying and selling psychology. Mastering the meaning of internal and external volume allows you to quickly judge who is controlling the stock price movement.

Orders and Trades: The Starting Point to Understand Internal and External Volume

To understand the meaning of internal and external volume, you first need to grasp a basic logic: every trade in the stock market begins with “someone wants to buy” and “someone wants to sell,” but these two sides are not necessarily eager to complete the transaction at the same time.

Before a stock trade occurs, there are two types of orders in the market: one is “pending orders” (limit buy and limit sell orders) waiting for someone to match, and the other is “immediate execution orders” (market buy or market sell orders) that are actively seeking to be filled right away. The true meaning of internal and external volume is to distinguish “who is actively pushing the trade.”

Imagine the current order book of TSMC:

• Buy side willing to bid: 1160 yuan / 1,415 shares (called “limit buy price”)
• Sell side willing to ask: 1165 yuan / 281 shares (called “limit sell price”)

There is a 5 yuan gap between the bid and ask, making a trade difficult to execute immediately. But if an investor urgently wants to sell, they might not wait for the buyer to raise the bid; instead, they accept the buyer’s bid of 1160 yuan to complete the trade—the seller actively lowers their price to match the buyer. This trade volume is recorded as “internal volume.”

Conversely, if an investor is eager to buy and refuses to wait for the seller to lower the price, they might directly accept the ask price of 1165 yuan—the buyer actively chases the higher price. This trade volume is recorded as “external volume.”

The Defensive and Offensive Dynamics Between Limit Orders—The Essence of Internal and External Volume

Now you can understand the meaning of internal and external volume: internal volume indicates seller urgency, external volume indicates buyer urgency.

When a trade occurs at the limit buy price (a lower price), it shows sellers are more eager, willing to sell at a discount to complete the trade—this is recorded as “internal volume.” From a short-term perspective, this often signals greater selling pressure, leaning towards a bearish signal—market sentiment is bearish.

When a trade occurs at the limit sell price (a higher price), it indicates buyers are more eager, willing to pay a premium to buy—this is recorded as “external volume.” From a short-term view, this usually suggests strong buying momentum, leaning towards a bullish signal—market sentiment is bullish.

This is the core meaning of internal and external volume: they are not random data but true reflections of market participants’ urgency and psychology.

The “Five-Level” Quote and Its Hidden Code

Many investors look at the five-level quote daily but don’t know what it actually shows. The five-level quote is composed of internal and external volume, displaying the most immediate five bid prices and five ask prices, along with the corresponding order quantities.

Left side “Buy 5” (usually green): shows the top five bid orders, indicating how much buyers are willing to pay.

Right side “Sell 5” (usually red): shows the top five ask orders, indicating how much sellers are asking.

For example, TSMC:

• Buy 1 (203.5 / 971 shares): the highest bid price and quantity in the market.
• Sell 1 (204.0 / 350 shares): the lowest ask price and quantity.

The smaller the gap between buy and sell prices, the higher the market activity; a larger gap suggests market hesitation.

Note: The five-level quote only shows pending order data; it does not guarantee that trades will happen. Major players may manipulate these numbers by canceling orders suddenly to create false signals, so relying solely on five-level quotes can be misleading.

The Market Psychology Behind Internal-External Volume Ratios

If internal and external volume indicate who is more eager, then the internal-external volume ratio is a tool to measure the degree of urgency.

The calculation is simple:

Internal-External Volume Ratio = Internal Volume ÷ External Volume

Based on this ratio, you can quickly gauge market direction:

• Ratio > 1: internal volume exceeds external volume, indicating sellers are more eager, increasing bearish sentiment, market leans “bearish.” Sellers actively lower prices, exerting downward pressure.

• Ratio < 1: external volume exceeds internal volume, indicating buyers are more eager, increasing bullish sentiment, market leans “bullish.” Buyers actively chase higher prices, pushing prices up.

• Ratio = 1: balanced forces, market is in stalemate or consolidation. Direction is unclear; wait for a clear trigger signal.

However, a key point is: the internal-external volume ratio is only a reference and should not be used alone to make investment decisions. The market is influenced by many other factors, such as overall market trend, company fundamentals, foreign institutional trading, etc.

Practical Application: How to Avoid Being Fooled by Major Players

After understanding the meaning of internal and external volume, many investors try to find “perfect signals” during trading hours but are often deceived by the strategic setups of big players. Major players manipulate internal and external volume data mainly through two methods:

“Fake Bullish Trap”:
When you see external volume significantly larger than internal volume, but the stock price remains flat or declines, with volume fluctuating, be cautious. It could be that big players are placing large sell orders (creating strong selling pressure) while secretly buying small lots to fake buying enthusiasm. Once retail investors chase the high, the big players suddenly withdraw their sell orders and dump large amounts of stock, causing the price to plummet.

“Fake Bearish Trap”:
Conversely, if internal volume is larger than external volume, but the stock price continues to rise slightly, with buy orders piling up at the top levels, it suggests big players are placing buy orders at low prices to create a false buying frenzy, while secretly selling some holdings to create a false selling signal. After retail investors get scared and sell off, the big players withdraw their buy orders and start accumulating, pushing the price higher.

How to avoid being deceived:
Don’t rely solely on one indicator. Use internal-external volume ratios in conjunction with price position, volume trends, order book direction, technical patterns, and fundamental news to form a comprehensive judgment. This multi-angle approach improves accuracy.

The Complementary Relationship Between Support/Resistance and Internal-External Volume

In technical analysis, understanding internal and external volume also benefits from considering “support zones” and “resistance zones,” which enhances decision-making.

When internal volume > external volume (more selling pressure), the stock tends to fall. But if the price hits a certain level and stops declining, it indicates strong buying interest at that level—forming a “support zone”—a potential rebound area. Smart investors consider buying on dips near support zones.

Conversely, when external volume > internal volume (more buying pressure), the stock tends to rise. But if the price cannot break through a certain level despite strong buying, it may be encountering a “resistance zone”—a zone where previous investors who bought at high prices are now eager to sell to cut losses. When the price approaches this level, selling pressure increases, causing a pullback.

Therefore, a short-term trading strategy could be:

• Buy near support zones (internal volume large, price rebounding).
• Short near resistance zones (external volume large, price facing resistance).
  If the price breaks below support or above resistance, it indicates a shift in the balance of power, often leading to a new trend—either a sustained decline or rally—until the next support or resistance level.

The Advantages and Limitations of Internal and External Volume

After understanding the concepts and applications, it’s important to recognize the strengths and weaknesses of internal and external volume indicators:

Advantages:

• Real-time data: They update instantly with market transactions, reflecting current buying and selling activity.
• Simple concept: Easy to understand—just compare internal and external volume ratios.
• Helpful for short-term analysis: When combined with order book data, volume trends, and technical analysis, they can improve short-term market direction predictions.

Limitations:

• Susceptible to manipulation: Big players can fake signals by placing and canceling orders to create false internal/external volume impressions.
• Short-term focus: They reflect immediate trading behavior but do not predict long-term trends or fundamental value.
• Market complexity: Market movements are driven by multiple factors—macro policies, industry news, fundamentals, foreign capital flows—that internal/external volume alone cannot capture.

Summary: The Meaning of Internal and External Volume and Investment Decisions

Returning to the core question: What is the meaning of internal and external volume?
Simply put, they are indicators measuring the relative strength of buying and selling forces in the market. Internal volume reflects sellers’ urgency (willing to lower prices), while external volume reflects buyers’ urgency (willing to chase higher). By analyzing the internal-external volume ratio, you can quickly gauge market sentiment.

But do not overestimate this indicator’s power. Market changes are driven by many factors, and internal/external volume is just one piece of the puzzle. Truly skilled investors combine this understanding with technical analysis, fundamentals, and market sentiment to form a comprehensive decision-making framework.

If you are a beginner, you can practice using these concepts with a demo account, such as Mitrade’s $50,000 virtual trading account. Practice in a simulated environment to accumulate experience, and once you are confident in applying internal and external volume analysis, transition to real trading with more stability.

Remember: No single indicator can determine market direction, and internal/external volume is no exception. Successful investing requires multi-dimensional observation to improve your chances of success.