How to interpret the inner and outer markets? A practical guide to five-level quotes and the comparison of internal and external markets

When opening a trading software for the first time, besides the price and the up/down figures, you’ll also see data such as Inner Market, Outer Market, and Level 5 Quotes. Many people look at these numbers but feel confused. In fact, they are the most direct tools for judging market buying and selling strength, especially crucial for short-term traders. This article will approach from a practical perspective to help you quickly understand these concepts and how to use them to predict stock price movements.

Starting with Active Transactions: Understanding the Essence of Inner Market and Outer Market

Before a stock transaction, there are two market conditions: order placement and real-time execution. The core difference between Inner Market and Outer Market is whether someone actively pushed the transaction.

Imagine a scenario: sellers want to raise the price and place a “Sell Limit Order,” while buyers want to lower the price and place a “Buy Limit Order.”

When the transaction occurs at the Buy Limit Price (indicating sellers are conceding and selling directly at the buyer’s low price), this transaction is recorded as Inner Market. This indicates sellers are more eager and willing to meet buyers’ prices—leaning towards a bearish signal.

When the transaction occurs at the Sell Limit Price (indicating buyers are conceding and buying at the seller’s high price), this transaction is recorded as Outer Market. This indicates buyers are more eager and willing to pay higher prices—leaning towards a bullish signal.

For example, TSMC’s quote: if the Buy Limit Order is 1160 yuan/1415 lots, and the Sell Limit Order is 1165 yuan/281 lots. If an investor immediately sells at 1160 yuan for 50 lots, these 50 lots are counted as Inner Market; conversely, if they immediately buy at 1165 yuan for 30 lots, these 30 lots are counted as Outer Market.

Level 5 Quotes: Quickly Grasp the Market’s Most Powerful Voice

Level 5 Quotes is almost always visible when opening a broker’s app, yet often overlooked. It is composed of Inner and Outer Market data, representing the top five bid prices and the top five ask prices in real-time.

On the left are Buy Side Level 5 (usually shown in green), representing the top 5 buy orders with the highest bid prices—showing the prices and lots buyers are willing to pay. On the right are Sell Side Level 5 (usually in red), representing the top 5 sell orders with the lowest ask prices—showing the prices and lots sellers are willing to sell.

The first row, Buy One and Sell One, are the most critical: Buy One (e.g., 203.5 yuan/971 lots) is the highest bid in the market, and Sell One (e.g., 204.0 yuan/350 lots) is the lowest ask. Note that Level 5 Quotes only display pending orders; they may not necessarily be executed and can be withdrawn at any time.

Inner Market to Outer Market Ratio: Using a Number to Judge Buying and Selling Strength

Short-term traders focus on whether the main transaction volume falls in Inner Market or Outer Market, which is the concept of Inner-Outer Market Ratio.

Calculation formula: Inner-Outer Market Ratio = Inner Market Transaction Volume ÷ Outer Market Transaction Volume

Based on the ratio:

• Ratio > 1: Inner Market volume exceeds Outer Market volume, indicating high bearish sentiment, sellers are aggressively selling—Bearish Signal.
• Ratio < 1: Inner Market volume is less than Outer Market volume, indicating high bullish sentiment, buyers are actively chasing prices—Bullish Signal.
• Ratio = 1: Buying and selling forces are balanced, the market is in stalemate, and future direction is uncertain; wait for clearer signals.

Practical Application: Combining Inner-Outer Market Ratio with Price Trends

Simply looking at the Inner-Outer Market Ratio is not enough; it must be combined with price position, volume, and order book structure to make accurate judgments.

Outer Market > Inner Market, and price rising: Buyers are actively pushing the price higher, a healthy bullish signal. If accompanied by increasing volume, the short-term upward momentum is even stronger.

Inner Market > Outer Market, and price falling: Sellers are actively unloading, driving the price down, a healthy bearish signal. If volume increases, the short-term downward pressure is greater.

Outer Market > Inner Market but price not rising, instead falling: Beware of a “False Bullish” signal. Major players may deliberately place sell orders to induce retail investors to buy actively, while secretly selling off. For example, if the price is sideways, Outer Market is significantly larger than Inner Market, but the sell orders at levels 1 to 3 keep increasing, followed by a sudden drop in price.

Inner Market > Outer Market but price not falling, instead rising: Beware of a “False Bearish” signal. Major players may deliberately place buy orders to induce retail investors to sell actively, while secretly accumulating shares. For example, if Inner Market exceeds Outer Market, with buy orders at levels 1 to 3 stacking up, but the price continues to climb.

Additionally, the market is influenced by sentiment, news, fundamentals, and other factors. Inner-Outer Market is just a part of technical analysis and cannot alone determine the trend.

Combining Inner-Outer Market with Support and Resistance Zones

Besides judging buying and selling strength, technical analysis emphasizes observing support zones and resistance zones.

Support Zone Mechanism

Although Inner Market > Outer Market indicates sellers are more eager, when the price drops to a certain level and cannot go lower anymore, it shows there are many buyers willing to enter at that price—this is a Support Zone. These buyers believe the price is cheap enough and expect a rebound, so investors can consider long positions.

Formation of Resistance Zone

Conversely, if Outer Market > Inner Market with strong buying momentum but the price fails to rise further and is blocked at a certain level, this is a Resistance Zone. Usually, at high levels, investors who bought at that price are reluctant to sell at a loss. When the price approaches again, they rush to sell to cut losses. The greater the selling pressure, the fewer willing buyers, and the price cannot break through the resistance.

Therefore, it is recommended to operate within support and resistance zones: buy when the price drops to support, sell when it reaches resistance. But if the stock breaks below support or above resistance, a new trend may form—either a continuous decline or a continuous rise until hitting the next support or resistance zone.

Advantages and Risks of Inner-Outer Market

Advantages

• Real-time: Inner and Outer Market data update simultaneously with transactions, reflecting the active buying and selling in the market instantly.
• Simple to understand: The concept is straightforward, requiring no complex calculations.
• Supports order book analysis: When combined with bid/ask orders and volume, it can improve short-term trend judgment.

Risks

• Manipulation by major players: Large traders can cycle through “placing orders—active transactions—cancel orders” to create false Inner and Outer Market data. Relying solely on these can lead to being misled into false longs or shorts.
• Short-term only: Inner and Outer Market reflect only current transaction behavior and cannot determine long-term trends.
• Potential distortion if used alone: Must be combined with volume, technical analysis, and fundamentals to avoid deception.

Summary

Inner and Outer Market are fundamental indicators to measure the strength of buying and selling forces. When Inner Market exceeds Outer Market, sellers are eager to sell directly at the Buy Limit Price, increasing the likelihood of a price decline; when Outer Market exceeds Inner Market, buyers are eager to buy at the Ask Price, increasing the chance of a price rise.

However, financial investment cannot rely on a single indicator. Inner-Outer Market ratio and support/resistance zones are part of technical analysis; investors should also consider company fundamentals and overall economic changes. Proper preparation can improve success rates. Remember: how to read Level 5 quotes, interpret orders, and coordinate volume are basic skills in technical analysis. Mastering them can significantly enhance trading accuracy.