What exactly is "Internal Market vs External Market"? A comprehensive article to understand the true meaning of stock market analysis

Opening your brokerage software to view the market, besides the opening price, highest, and lowest prices, the most commonly seen data are “internal volume” and “external volume.” But what do these two terms really mean? Why do short-term traders care so much about this indicator? Actually, behind internal and external volume lies a simple yet powerful logic: Who is eager to execute the trade? Let’s start from zero and thoroughly understand this market psychology indicator.

The Core Logic of Internal and External Volume: Who Is Driving the Trade?

To understand internal and external volume, first, we need to grasp the “order book” before a trade occurs.

Before a transaction, there are two types of prices in the market:

• Buyer’s bid price (bid): the highest price a buyer is willing to pay
• Seller’s ask price (ask): the lowest price a seller is willing to accept

It’s like buying a house: a buyer bids 1160 yuan, a seller asks 1165 yuan. There’s a 5-yuan gap, and it depends on who compromises first.

The trade occurs at whose price, indicating who is proactive

True meaning of internal volume: Sellers are compromising

When a trade occurs at the “buyer’s bid price,” it indicates that the seller is eager to offload, willing to sell at a lower price. This transaction is recorded as “internal volume.” From a market psychology perspective, high selling activity suggests strong selling pressure, which is a bearish signal.

Example: TSMC’s buy orders at 1160 yuan for 971 shares, but the seller doesn’t care about the 1165 yuan ask and sells 50 shares at 1160 yuan. These 50 shares are internal volume, representing sellers in a hurry.

True meaning of external volume: Buyers are compromising

Conversely, when a trade occurs at the “seller’s ask price,” it indicates that the buyer is eager to take over, willing to buy at a higher price. This transaction is recorded as “external volume.” High buying activity suggests strong buying momentum, a bullish signal.

Example: If buyers don’t wait and buy 30 shares at 1165 yuan (the ask price), these 30 shares count as external volume, indicating active buyers.

Simple rule of thumb: Trade at a lower price = internal volume (sellers in a hurry); trade at a higher price = external volume (buyers in a hurry).

The Behind-the-Scenes of the Five-Level Quote: Buying and Selling Power

Many investors watch the “five-level quotes” daily but don’t understand what the numbers mean. The five-level quote is essentially a real-time snapshot of a “price battle scene.”

What is the five-level quote?

It consists of the order book of buy and sell orders:

• Left side (green): Top 5 buy orders, sorted from highest to lowest bid price

  • Buy 1 is the most aggressive buyer (highest bid)
  • Buy 2, Buy 3, etc., are at progressively lower prices, indicating decreasing resolve

• Right side (red): Top 5 sell orders, sorted from lowest to highest ask price

  • Sell 1 is the most urgent seller (lowest ask)
  • Sell 2, Sell 3, etc., are at higher prices, with decreasing urgency

For example, TSMC’s quote: Buy 1 at 203.5 yuan for 971 shares (highest bid), Sell 1 at 204.0 yuan for 350 shares (lowest ask). The 0.5 yuan difference is the “battle point” between buyers and sellers.

Important reminder about five-level quotes

Note: The five-level quote only shows the displayed orders; it does not guarantee that these will be executed. Major players may place large orders to scare retail traders, then withdraw them quietly, or place large buy orders to attract chasing buyers. Therefore, when viewing the five levels, always observe whether actual trades follow the displayed orders.

How to read the internal and external volume ratio?

By comparing internal and external volume, we get the “internal-to-external volume ratio.”

Simple calculation formula

Internal-External Volume Ratio = Internal Volume ÷ External Volume

• Ratio > 1: internal volume exceeds external volume, indicating sellers are more eager, showing bearish sentiment (偏空)
• Ratio < 1: external volume exceeds internal volume, indicating buyers are more eager, showing bullish sentiment (偏多)
• Ratio = 1: balanced forces, market is indecisive, waiting for a new signal

Practical interpretation rules

• External > Internal + Price Rising: Buyers dominate, healthy bullish trend (especially with increasing volume)
• Internal > External + Price Falling: Sellers dominate, healthy bearish trend (with increasing volume)
• External > Internal but price declines: Beware of “false bullishness,” possibly a trap set by big players to lure retail into buying high, then dumping
• Internal > External but price rises: Beware of “false bearishness,” possibly a trap to scare retail into selling, while big players accumulate

Case Study: Identifying True Bulls vs. Fake Bulls

Red flags for fake bullish signals

Suppose during trading:

• Price consolidates sideways
• External volume is significantly larger than internal volume
• But you notice: Sell orders (Sell 1 to Sell 3) keep increasing, which is a trap signal. Major players might first push the price up with large buy orders to attract retail, then place large sell orders at high levels to dump. Retail sees big external volume and chases, only to get trapped.

Detection tip: External volume large + Sell 1 orders keep increasing + price stagnates = beware of a trap.

Green lights for genuine bullishness

Conversely: price gradually rises, external volume exceeds internal volume, and buy orders (Buy 1 to Buy 3) keep piling up (buyers becoming more aggressive). This scenario is more reliable because:

• Trades occur at high prices (external volume)
• Buy orders accumulate (more aggressive buying)
• Price continues to push higher

This mutual confirmation indicates genuine buying strength.

Support and Resistance signals from internal and external volume

Besides the ratio, traders combine internal/external volume with “support zones” and “resistance zones.”

When a support zone encounters high internal volume

If the price hits a key support level and can’t go lower, but internal volume is high (indicating selling pressure), yet the price stabilizes, it suggests strong buying interest at that level—large buyers are quietly accumulating, forming a solid support. This is a bullish setup.

Trading tip: Price hits support + internal volume high + price stops falling = consider entering long.

When a resistance zone encounters high external volume

If external volume is high (buying looks strong), but the price repeatedly fails to break through a certain level, it indicates heavy selling at that level—possibly from trapped high-cost holders. This creates a resistance zone.

Trading tip: Price reaches resistance + external volume high + stalls = beware of selling pressure, consider shorting or cautious approach.

Range trading: the golden rule

When the price oscillates between support and resistance zones:

• Buy near support and sell near resistance
• Short near resistance and cover near support

Once the price breaks through support or resistance decisively, the prevailing force dominates, leading to a trending move until the next support or resistance level.

Advantages and pitfalls of internal and external volume

Three advantages

1. Real-time market sentiment: Reflects the urgency of buyers and sellers instantly.
2. Simple concept: Easy for beginners to understand and apply.
3. Effective with other tools: When combined with order book, volume, and technical analysis, enhances short-term prediction accuracy.

Three pitfalls

1. Manipulation risk: Major players can fake internal/external volume by placing and withdrawing large orders.
2. Short-term indicator: Only reflects momentary activity, not long-term trend.
3. Misleading if used alone: Must be combined with volume, chart patterns, fundamentals for reliable analysis.

Final practical advice

The true meaning of internal and external volume is: “At this moment, who is more eager to execute?” Internal volume large indicates sellers are eager; external volume large indicates buyers are eager. This simple logic is rooted in market psychology.

However, no single indicator can predict the market reliably. Internal and external volume are just tools in your analysis toolbox; they should be used together with:

• Order book analysis (“who is setting traps”)
• Volume confirmation (“is the buying/selling real”)
• Support/resistance zones (“is the trend supported”)
• Fundamental news (“are short-term fluctuations justified”)

Treat the market seriously, use each indicator cautiously, and long-term consistent profits come from comprehensive analysis. Practice on demo accounts, test different market scenarios, and find the trading logic that suits you best.