Mastering the strength of buy and sell orders: How to predict stock price trends using the internal and external volume ratio?

When analyzing the market, have you ever noticed those seemingly mysterious numbers of “internal volume” and “external volume”? Many investors focus daily on transaction prices, high and low prices, but overlook these important signals hidden within trading details. In fact, the internal and external volume ratio can intuitively reflect the shift in market attitudes of buyers and sellers, and even predict the next move of short-term funds.

The Essence of Trading: Who Initiates the Transaction?

To understand internal and external volume, first clarify a core logic—who is actively driving the trade.

In the stock market, there are two quoting methods: sellers place “ask prices” (hoping to sell higher), buyers place “bid prices” (hoping to buy cheaper). These are just orders; actual transactions are what count.

When the bid volume exceeds the ask volume, it indicates more buy orders, stronger buying interest. But more importantly, who chooses to actively match the other side’s order:

Internal volume transaction: The stock is sold at the “bid price,” meaning the seller is very eager, willing to lower the price to meet the buyer. This is a seller-initiated action, indicating selling pressure, a bearish signal.

External volume transaction: The stock is bought at the “ask price,” meaning the buyer is very proactive, willing to pay more to buy. This is a buyer-initiated action, indicating chasing momentum, a bullish signal.

Taking TSMC as an example: the bid at 1160 yuan has 1415 lots, the ask at 1165 yuan has 281 lots. If an investor immediately wants to sell, they can place an order at 1160 and execute 50 lots; these 50 lots count as internal volume. If they want to buy immediately, they can place an order at 1165 and execute 30 lots; these 30 lots count as external volume.

The Five-Level Quote as a Mirror of the Order Book

Every time you open your broker app, the “five-level quote” directly shows the internal and external volume.

Buy five levels (left, green): the top 5 bid orders in the market, representing the prices and lots buyers are willing to pay.

Sell five levels (right, red): the top 5 ask orders, representing the prices and lots sellers are willing to sell.

For example, “Buy 1 at 203.5 yuan / 971 lots” indicates the current highest bid is 203.5 yuan with 971 lots waiting; “Sell 1 at 204.0 yuan / 350 lots” indicates the lowest ask is 204.0 yuan with 350 lots available.

Note: These are just order commitments; they can be withdrawn at any time and do not necessarily result in a transaction.

Internal vs. External Volume Ratio: Quantifying Buying and Selling Momentum

To judge who is more eager in the current market, look at the internal to external volume ratio.

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

Interpretation:

• Ratio > 1: Internal volume exceeds external volume, indicating sellers are more urgent, and there is a clear selling pressure → bearish signal
• Ratio < 1: Internal volume is less than external volume, indicating buyers are more active, and there is a clear chasing-up phenomenon → bullish signal
• Ratio = 1: Buying and selling forces are balanced, the market is in stalemate, trend is unclear → wait-and-see signal

How to Accurately Use the Internal-External Volume Ratio? Combining Three Dimensions

Relying solely on the ratio can be misleading. Smart short-term investors observe price position, volume changes, and order book structure simultaneously:

True bullish signal: External volume > Internal volume + Price rising + Volume increasing simultaneously = Buyers actively pushing up the price, short-term upward momentum strong.

True bearish signal: Internal volume > External volume + Price falling + Volume increasing simultaneously = Sellers actively selling, driving the price down, short-term downward pressure strong.

Hidden trap — Fake bullish: External volume > Internal volume + Price sideways or falling + Volume fluctuating wildly = Beware! Major players may place large sell orders to lure retail investors to buy actively, secretly selling off. The “bullish” appearance is an illusion.

Hidden trap — Fake bearish: Internal volume > External volume + Price slightly rising + Abnormal volume fluctuations = Beware! Major players may deliberately place buy orders to induce retail investors to sell, while actually accumulating shares. The price may suddenly surge afterward.

Important reminder: Besides volume, market sentiment, news, and fundamentals also influence the market. Therefore, a larger internal volume does not necessarily mean the stock price will fall; sometimes it can rise. This is why relying on a single indicator is unreliable.

Support and Resistance Zones: Advanced Use of Internal-External Volume Ratio

Technical analysis is not just about measuring buying and selling strength but also about observing at what price levels the stock encounters resistance or support.

Meaning of Support Zone

Although internal volume > external volume indicates more sellers eager to sell, if the price drops to a certain level and cannot go lower, it shows there are many buyers willing to buy at that price. These buyers believe the price is cheap and expect the market to rise, making this a support zone. When the price returns near this zone, investors can consider going long.

Meaning of Resistance Zone

Conversely, if external volume > internal volume indicates strong buying interest, but the price cannot break through a certain level, it suggests there are many sell orders waiting to “unload” at that level. These sellers bought at high prices and are now trapped; once the price approaches their cost, they rush to sell. The more trapped sell orders, the harder it is to break through upward, making this a resistance zone.

Practical Trading Suggestions

When the stock moves between support and resistance zones, a range trading strategy can be employed:

• Buy when falling to support zone (go long)
• Sell when rising to resistance zone (go short)
• Repeatedly buy low and sell high within the range

But once the price breaks below support or above resistance, it indicates the original buying or selling pressure has failed to hold the market sentiment. The price usually moves in one direction (downward or upward) until it hits the next support or resistance zone.

The Truth About Internal and External Volume: Advantages and Limitations

Advantages

Real-time: Data updates instantly with transactions, reflecting market sentiment changes quickly.

Simple concept: No complex calculations, easy for beginners.

Order book tools: Combining bid/ask orders and volume observations can improve short-term trend judgment accuracy.

Limitations

Susceptible to manipulation: Smart big players can use “placing orders → executing → canceling” tricks to create fake internal and external volume signals. Relying solely on this can be easily deceived.

Only reflects short-term behavior: Internal and external volume capture current trading actions but cannot determine long-term trends. Suitable for short-term trading, not long-term investing.

Must be combined with other indicators: Using it alone can be misleading; always consider volume, technical analysis, and fundamentals together for more reliable judgment.

Final Advice

Internal and external volume are effective tools for observing market buying and selling strength. Comparing their relative sizes can help you quickly interpret the urgency of both sides. When internal volume is large, selling pressure is heavy; when external volume is large, chasing momentum is strong.

But there are no foolproof methods in investing. The internal-external volume ratio, support and resistance zones, etc., are only parts of technical analysis. Investment decisions should also consider company fundamentals, macroeconomic cycles, and policy environments. Only by doing thorough research and being well-prepared can you truly improve your success rate.