Common pitfalls retail investors often fall into: The internal and external volume ratio may not tell you the truth

The internal and external volume data on trading software are constantly fluctuating every second. Many traders see the internal volume suddenly surge and rush in, only to get trapped badly. Why does this happen? Because the internal/external volume ratio is not a prediction machine; it’s just a real-time market snapshot of buying and selling attitudes.

What exactly does the internal/external volume ratio measure?

When you place an order to buy stocks, there are two types of quotes in the market—sellers listing high prices waiting for buyers (ask price), and buyers listing low prices waiting for sellers (bid price).

The moment a trade occurs is when we see who is more urgent.

When someone can’t hold back and sells directly at the bid price, this trade is counted as internal volume, indicating sellers are eager to offload; conversely, if someone can’t resist and buys at the ask price, this trade is counted as external volume, showing buyers are chasing the rally.

For example, TSMC:

• Bid at 1160 yuan, wanting to buy 1,415 shares
• Ask at 1165 yuan, wanting to sell 281 shares

If you sell 50 shares at 1160 directly → internal volume +50 (you’re accommodating the buyer) Someone else buys 30 shares at 1165 → external volume +30 (they’re chasing the seller)

Essentially, the internal/external volume ratio measures who is more urgent in the market.

Level 5 quotes: placing orders does not equal成交

The first glance at the five-level quotes on your trading software shows the left side in green as the top five bid orders, and the right side in red as the top five ask orders. The first bid and ask represent the highest bid and lowest ask in the market.

But these are just orders, not necessarily成交. Many people look at these numbers and fantasize, only to find that when the main players cancel orders, it’s all air.

Practical interpretation of the internal/external volume ratio

Internal/external volume ratio = internal volume ÷ external volume

• Ratio > 1: Internal volume exceeds external volume, indicating sellers are more aggressive → bearish signal
• Ratio < 1: External volume exceeds internal volume, indicating buyers are more eager → bullish signal
• Ratio = 1: Bulls and bears are balanced, market is stalemated, waiting for a breakout

But beware of a big pitfall: the internal/external volume ratio only reflects current buying and selling attitudes, not future trend directions.

Four major practical traps

1. False bullish signals
External volume appears much larger than internal volume, but the stock price doesn’t rise or even falls, with volume fluctuating wildly? Be alert to main players inducing a bull trap. They pile buy orders from level 1 to 3 to attract retail buyers, secretly selling off themselves. This often happens during sideways trading.

2. False bearish signals
Internal volume is significantly larger than external volume, but the stock price rises slightly or stays flat, with buy orders from level 1 to 3 continuously stacking up? This could be a manipulation by the main players creating a panic illusion, inducing retail investors to sell, while secretly accumulating shares. A rally may follow.

3. Order book trap
The structure of bid and ask orders is often a deception. Main players can use a combination of “placing orders →主动成交 (active成交) → canceling orders” to artificially create false internal/external volume data. Relying solely on this indicator can lead to wrong directions.

4. Ignoring fundamentals consequences
No matter how beautiful the internal/external volume ratio looks, it cannot change the fact that a company’s fundamentals may be deteriorating. Sometimes, internal volume > external volume, but the stock still rises later. This is because the market is influenced by news, sentiment, fundamentals, and other factors, not just the internal/external volume ratio.

How to properly use the internal/external volume ratio

Combine it with stock price position, volume, and order book structure for meaningful analysis:

• External volume > internal volume + stock price rising + increasing volume: Buyers are actively pushing the price up, a healthy bullish signal, short-term momentum strong
• Internal volume > external volume + stock price falling + increasing volume: Sellers are actively unloading, driving the price down, a healthy bearish signal, short-term downward pressure strong
• External volume > internal volume + stock price not rising but falling + abnormal volume: Fake bullish, beware
• Internal volume > external volume + stock price not falling but rising + abnormal volume: Fake bearish, possibly accumulating shares

Support and resistance are the real focus

Looking at the internal/external volume ratio alone isn’t enough; it’s more important to identify support zones and resistance zones.

When a stock falls to a certain price level and can’t go lower, it indicates many believe this price is cheap enough to buy—this is a support zone. When the stock rebounds from here, consider entering long.

Conversely, when a stock rises to a certain level but can’t break through, it may be a resistance zone where previous trapped sellers are eager to unload, creating selling pressure. Each time the price approaches, selling pressure emerges.

Practical strategy: buy at support zones when falling, sell at resistance zones when rising.
If the stock breaks below support or above resistance, it often signals a trend reversal, leading to a continuous decline or rise until hitting the next support or resistance zone.

The real limitations of the internal/external volume ratio

Advantages:

• Data updates instantly, reflecting the fastest market sentiment
• Simple concept, easy to grasp, low entry barrier
• When combined with volume and order book analysis, short-term judgment accuracy is decent

Fatal flaws:

• Easily manipulated by main players, false signals everywhere
• Only reflects current成交 behavior, cannot predict long-term trend
• Relying solely on it can lead to distortion; must be used with other indicators

Final words

The internal/external volume ratio is like a thermometer; it only tells you the current “temperature” of the market (buying and selling urgency), not how a cold or flu will develop.

Don’t get overwhelmed by the daily fluctuations of the internal/external volume ratio. True investing experts combine technical analysis, fundamentals, and market sentiment—doing your homework is key to improving your win rate. Relying solely on order book data and short-term indicators like the internal/external volume ratio often results in getting chopped up.

The internal/external volume ratio is a tool, not a prediction. Using it well requires experience; misusing it can trap you.