Is a higher internal volume than external volume necessarily a sign of price increase? The buy and sell momentum code that short-term traders must understand

Many beginners notice two data points on the chart: “internal volume” and “external volume,” and often hear investors discuss the “internal-external volume ratio,” but they don’t quite understand what these indicators actually represent. In fact, these three concepts are key to judging short-term buying and selling strength and can help you identify false signals in the market. This article will analyze the practical application logic of internal volume, external volume, and the internal-external volume ratio, especially the true meaning behind when internal volume exceeds external volume.

What are internal and external volume? Understand the essence of buying and selling strength in one go

Before a stock transaction occurs, there are two situations in the market:【Pending Orders】and【Real-time Executed Orders】. The key to understanding internal and external volume lies in clarifying who is actively executing trades.

Sellers aiming to push up the price will place “ask” orders, while buyers wanting to lower the price will place “bid” orders. When a trade occurs at the bid price, it is recorded as internal volume, indicating that sellers are actively lowering expectations to match buyers’ quotes—that is, it reflects urgent selling pressure. When a trade occurs at the ask price, it is recorded as external volume, indicating that buyers are actively raising their bids—that is, it reflects urgent buying momentum.

For example, TSMC’s quote:

• Bid side: 1160 yuan / 1415 lots (buyers willing to buy at 1160 yuan for 1415 lots)
• Ask side: 1165 yuan / 281 lots (sellers willing to sell at 1165 yuan for 281 lots)

If an investor wants to sell immediately, they might place an order at 1160 yuan and execute 50 lots directly—this is sellers actively matching buyers, counted as internal volume. Conversely, if an investor wants to buy immediately, they might place an order at 1165 yuan and execute 30 lots—buyers actively matching sellers, counted as external volume.

Therefore, internal and external volume fundamentally reflect the urgency of market participants to trade, not just simple buying or selling.

How to interpret the five-level quotes? Grasp the key difference between pending orders and trades

When opening a broker app or chart software, the first thing you usually see is the five-level quotes. These are composed of pending orders from buyers and sellers, divided into two sides:

Left side (usually green): The top 5 highest bid orders, showing the prices and quantities buyers are willing to pay.

Right side (usually red): The top 5 lowest ask orders, showing the prices and quantities sellers are willing to accept.

For example, the top bid (203.5 yuan / 971 lots) is the highest current bid, and the top ask (204.0 yuan / 350 lots) is the lowest current ask.

Important reminder: The five-level quotes only show pending orders, which can be withdrawn at any time and do not necessarily execute. To understand actual trades, you need to look at internal and external volume data.

The psychological behind the internal-external volume ratio: what does it really mean when internal volume exceeds external volume?

Short-term traders focus on whether the traded volume is on the “internal” or “external” side, which is the core of the internal-external volume ratio.

The calculation is simple: Internal-External Volume Ratio = Internal Volume ÷ External Volume

Based on the ratio:

• > 1 (internal > external): Sellers are eager to sell at lower prices, market sentiment is bearish, a bearish signal.
• < 1 (internal < external): Buyers are eager to buy at higher prices, market sentiment is bullish, a bullish signal.
• ≈ 1 (internal ≈ external): Buying and selling forces are balanced, market is in stalemate, direction is uncertain.

A common misconception: Many beginners think “internal volume greater than external volume means the stock price must fall,” or “external volume greater than internal volume means the stock price must rise.” In reality, the ratio must be combined with price position, trading volume size, and order book structure for accurate judgment.

How to operate when internal volume exceeds external volume? Practical tips combining support and resistance zones

When internal volume exceeds external volume, it indicates sellers are more eager to trade. But the trading direction in this situation depends entirely on the stock price relative to support and resistance zones.

Opportunities at support zones

When internal volume exceeds external volume, and the price drops to a certain level but does not fall further, it suggests a large number of buyers believe the price is cheap and are willing to buy at this level. This is a support zone. These buyers expect the price to rebound later, forming buying support. Although internal volume is large, the presence of buy orders prevents further decline, indicating a potential rebound. Short-term traders can consider going long.

Resistance zones

Conversely, if external volume exceeds internal volume but the price remains stuck at a certain level, forming a resistance zone. This often comes from investors trying to cut losses at high levels. When the price rises to this zone, they rush to sell, increasing selling pressure. The larger the selling pressure, the fewer buyers willing to push the price higher, leading to continued resistance.

Practical trading tips:

• Buy at support zones when the price dips
• Sell or short at resistance zones when the price rises

If the stock breaks below support or surpasses resistance, the original buying or selling pressure is no longer dominant, often triggering a one-sided trend—either a continuous decline or rise until hitting the next support or resistance.

Beware of false signals: trap scenarios for bulls and bears

Internal volume exceeding external volume is not always a bearish signal, nor is external volume exceeding internal always bullish. Major players often manipulate pending orders, trades, and cancellations to create false internal-external volume data, misleading retail traders.

Bull trap

External volume > internal volume but price does not rise, instead falls, with volume fluctuating: beware of a “fake bullish” signal. Major players may place large orders at the ask to lure retail buyers in, then secretly sell at higher prices. For example, during sideways movement, external volume is high, but suddenly the price plunges with many internal volume signals—indicating the “buy” orders were fake.

Bear trap

Internal volume > external volume but price does not fall, instead rises, with volume fluctuating: beware of a “fake bearish” signal. Major players may accumulate large buy orders to induce retail selling, then suddenly push the price up. For example, during slight dips, internal volume is high, but the price surges with large external volume—indicating the “sell” pressure was fabricated.

Judgment tip: Observe the rhythm of volume changes. Genuine buying and selling strength usually show steady, consistent volume; false signals often involve erratic, inconsistent volume spikes.

Advantages and limitations of internal-external volume indicators

Advantages

• High immediacy: Data updates in real-time, reflecting the active buying and selling intentions of market participants, suitable for short-term trading.
• Easy to understand: Simple concepts that beginners can quickly grasp.
• Complementary to order book analysis: When combined with pending orders and volume analysis, can improve short-term trend judgment.

Limitations

• Prone to manipulation: As discussed, major players can fake internal and external volume data through order placements and cancellations, leading to misleading signals.
• Short-term focus: Reflects current trading behavior, limited in predicting long-term trends.
• Requires combined analysis: Should be used alongside volume, technical indicators (support/resistance, trendlines), and fundamental analysis for more accurate decision-making.

Summary: Master internal and external volume to complete your trading toolkit

When internal volume exceeds external volume, it appears as a bearish signal on the surface; when external volume exceeds internal, it appears bullish. But in actual trading, the meaning depends on price position, volume background, and market structure.

In short, internal and external volume are real-time indicators of market buying and selling forces, helping traders quickly gauge market sentiment. However, successful investing cannot rely on a single indicator. Internal-external volume ratio, support/resistance levels, and other technical tools should be combined with fundamental analysis and risk management.

Investors should:

• Combine with company fundamentals
• Observe macro-economic conditions
• Continuously learn and apply other technical indicators
• Cultivate risk management discipline

Through continuous practice and review, integrating internal-external volume indicators into your trading system can significantly improve your success rate. If you want to experience these indicators in live trading, you can use Mitrade’s demo account with $50,000 virtual funds to practice risk-free.

For further reading, these introductory articles on technical analysis are recommended:

• Bollinger Bands Profit Tips: How to Use Bollinger Bands for Short-term Trading?
• What are Head and Shoulders Top and Bottom? How to Analyze Them?
• What is RSI? How to Handle RSI Divergence and Damping?