Understanding the internal and external trading volume ratio is essential to judge short-term buying and selling momentum.

When opening trading software, do you often see terms like “internal volume,” “external volume,” and “internal-external volume ratio,” but aren’t quite sure what they truly mean? In fact, these indicators can help investors quickly perceive the urgency of buying and selling sides in the market, serving as an important reference for short-term trading.

Understanding Internal and External Volume through “Active Transactions”

The core concept of internal and external volume is simple—they distinguish who is actively driving the transactions.

In the stock market, sellers will place “ask prices” hoping to raise the price, while buyers will place “bid prices” hoping to lower the price. When a transaction occurs, it essentially means one side actively compromised:

• Transaction at the bid price: Sellers actively accept the buyer’s bid, and these transaction volumes are recorded as internal volume, indicating sellers are eager to offload their shares.
• Transaction at the ask price: Buyers actively pay higher to match the seller’s ask, and these volumes are recorded as external volume, indicating buyers are eager to enter the market.

For example: Suppose the current bid is 1160 yuan with 1415 lots, and the ask is 1165 yuan with 281 lots. If an investor immediately sells 50 lots at 1160 yuan, these 50 lots are counted as internal volume; if another investor immediately buys 30 lots at 1165 yuan, these 30 lots are counted as external volume.

Level 5 Quote: Real-time Market Buy/Sell Suspense

The level 5 quote consists of internal and external volumes, showing the top five bid prices and top five ask prices and their corresponding order quantities.

The left side (usually green) represents the top 5 highest bid orders, and the right side (usually red) shows the top 5 lowest ask orders. The first row “Bid 1” is the current highest bid price, and “Ask 1” is the lowest ask price.

Note: The level 5 quote only displays order commitments, not necessarily executed trades—people can withdraw orders at any time.

Practical Interpretation of Internal-External Volume Ratio

Short-term traders care most about whether more volume is on the internal or external side. This introduces the concept of the internal-external volume ratio.

The calculation formula is straightforward:

Internal-External Volume Ratio = Internal Volume ÷ External Volume

Based on the result:

• Ratio > 1: Internal volume exceeds external volume, indicating sellers are more active in offloading, market sentiment is bearish, often a bearish signal.
• Ratio < 1: External volume exceeds internal volume, indicating buyers are more active in entering, market sentiment is bullish, often a bullish signal.
• Ratio = 1: Buying and selling forces are balanced, market is in stalemate, the future trend is uncertain.

How to practically apply the internal-external volume ratio?

The ratio helps you understand the mindset of buyers and sellers, but relying on it alone can be misleading. Combining it with price position, volume, and order book structure makes it more reliable:

• External volume > Internal volume, and price rising: Buyers are actively pushing the price higher, a healthy bullish signal; if volume also increases, the short-term rally will be stronger.
• Internal volume > External volume, and price falling: Sellers actively offload, driving the price down, a healthy bearish signal; increased volume indicates greater downward pressure.
• External volume > Internal volume but price not rising but falling, with large volume fluctuations: Beware of “trap to induce buying”—main players may deliberately place buy orders to attract retail investors but secretly sell off. For example, when the price is sideways, external volume is much larger than internal, but sell orders from sell 1 to sell 3 are continuously stacking.
• Internal volume > External volume but price not falling but rising, with large volume fluctuations: Watch out for “trap to induce selling”—main players may place large sell orders to scare off retail investors but secretly accumulate. For example, when the price slightly rises, internal volume exceeds external, but buy orders from buy 1 to buy 3 are increasing, yet the price continues to go higher.

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

Looking at the internal-external volume ratio alone isn’t enough; the essence of technical analysis lies in observing support zones and resistance zones.

When the stock price drops to a certain level but does not fall further, it indicates a large number of buyers are willing to build positions here, believing the price has become sufficiently cheap—this is a support zone. These buyers expect a rebound, and investors may consider going long.

Conversely, when strong buying pressure cannot push the price higher and is blocked at a certain level, that becomes a resistance zone. Resistance zones often come from investors who bought at high prices and are now trapped, eager to exit. When the price approaches these levels, they sell off, increasing selling pressure, making it harder for buyers to push the price higher.

Practical strategy: trade within support and resistance zones—buy near support, sell near resistance; if the price breaks below support or above resistance, it usually signals a new trend is starting, continuing until the next support or resistance level.

Pros and Cons of Internal-External Volume Ratio

Advantages

Real-time: Data and transactions update simultaneously, quickly reflecting the active intentions of buyers and sellers.
Easy to understand: Simple concept, no complex calculations needed.
Supports order book analysis: Combining bid/ask orders and volume can improve short-term judgment accuracy.

Limitations

Prone to manipulation: Main players can use “placing orders—executing—canceling” tricks to artificially create internal and external volume data; relying solely on it can be deceiving.
Short-term only: Reflects only current transaction behavior, not long-term trends.
Distortion if used alone: Must be combined with volume, technical analysis, and fundamental analysis for better accuracy.

Final Reminder

The internal-external volume ratio is a tool to measure market buying and selling strength, helping you quickly grasp the sentiment of both sides. However, there is no single “万能指标” (all-powerful indicator) in financial investment—internal-external volume ratio and support/resistance zones are just parts of technical analysis.

True investment decisions also require considering company fundamentals, macroeconomic trends, and other factors. Mastering more tools and doing thorough research will help you continuously improve your success rate.