Understanding "Ask Price" and "Bid Price": Essential Market Terminology for Short-Term Investors

When opening trading software, besides the opening price, high, and low, you will definitely see the data for “Inner Market” and “Outer Market.” Many novice investors are unfamiliar with these terms, but in reality, the outer and inner markets reflect who is actively pushing the price. Mastering this indicator can help you quickly judge the true intent of short-term funds. This article will guide you from zero to understanding the inner and outer markets and how to use the outer market to analyze market trends.

The Essence of Outer and Inner Markets: Who Is Driving the Stock Price?

To understand the outer and inner markets, first grasp a core concept: Who actively matches the other side’s quote?

Before each stock transaction, there are two prices in the market — the “Ask Price” (the price sellers want to sell at) and the “Bid Price” (the price buyers want to buy at). When one side actively makes concessions to facilitate a trade, it results in either the inner or outer market.

Specifically:

Outer Market — Buyers actively pushing the price
When investors want to buy immediately and are willing to transact at the ask price (the higher price quoted by sellers), this volume is recorded as the “Outer Market.” This indicates that buyers are more aggressive and willing to pay a premium, a typical bullish signal.

Inner Market — Sellers eager to exit
When investors want to sell immediately and are willing to transact at the bid price (the lower price quoted by buyers), this volume is recorded as the “Inner Market.” This shows sellers are eager to offload and willing to accept lower prices, a bearish signal.

For example, TSMC’s order book: suppose the bid is 1160 yuan/1,415 shares, and the ask is 1165 yuan/281 shares. If an investor immediately buys 30 shares at 1165, this transaction counts as outer market, indicating active pursuit by buyers. Conversely, if someone immediately sells 50 shares at 1160, this counts as inner market, indicating sellers are eager to exit.

Level 5 Quotes: A Quick Tool to Read Market Structure

Level 5 quotes are the most common screen for Taiwanese investors on their brokerage apps, but many beginners don’t understand what they mean.

Level 5 quotes consist of:

• Top 5 Bid Orders (usually shown in green): the five highest bid prices in the market
• Top 5 Ask Orders (usually in red): the five lowest ask prices in the market

The first bid (e.g., 203.5/971 shares) shows the highest bid price; the first ask (e.g., 204.0/350 shares) shows the lowest ask price. The difference between bid and ask is called the “Bid-Ask Spread.”

Note that Level 5 quotes only show pending orders; they do not guarantee execution, as traders can cancel orders at any time.

Does Outer Market > Inner Market Always Mean Price Rise? The Truth About Level 5 Quotes

Short-term traders pay close attention to whether the transaction volume falls into the “inner” or “outer” market, i.e., the “Inner-Outer Market Ratio.”

Inner-Outer Market Ratio: $$ \text{Inner-Outer Ratio} = \frac{\text{Inner Market Volume}}{\text{Outer Market Volume}} $$

How to interpret:

• Ratio > 1: Inner market volume exceeds outer market volume, indicating high bearish sentiment, sellers actively lowering prices, a bearish signal.
• Ratio < 1: Outer market volume exceeds inner market volume, indicating bullish sentiment, buyers actively chasing prices, a bullish signal.
• Ratio = 1: Buying and selling forces are balanced; the market is consolidating, and the future direction is uncertain.

But the key point is: When outer market volume exceeds inner market volume, it only indicates potential strength if combined with other factors.

Here are four common practical scenarios:

Pitfalls of Outer Market Analysis: Recognizing “Fake” Moves by Major Players

Many investors fall into traps set by market manipulators when relying solely on outer market signals.

“Fake Bullish” Trap (False Outer Market Expansion):
Major players may deliberately place large sell orders at high prices, creating a false appearance of market strength and attracting retail investors to chase the rally. In reality, they have already prepared buy orders at lower prices. Once retail investors buy in, the big players cancel their sell orders and dump shares en masse. Characteristics: stock price consolidates, outer market volume is large, but the top ask orders (e.g., ask 1-3) keep increasing, then the price suddenly drops.

“Fake Bearish” Trap (False Inner Market Expansion):
Major players may place large buy orders at low prices, creating a false appearance of strong buying, enticing retail investors to sell. Once retail investors sell out, the big players cancel their buy orders and push the price higher. Characteristics: slight price increase, inner market volume is large, but top bid orders (e.g., bid 1-3) keep stacking, then the price continues upward.

How to avoid these traps:

1. Observe whether the displayed orders are likely to be executed or just canceled to fake activity.
2. Combine with volume changes; fake signals often show volume fluctuations.
3. Consider price support and resistance levels for more reliable signals.

Support and Resistance: The Golden Entry Points When Combining Outer Market Analysis

Besides real-time inner and outer market data, technical analysis emphasizes identifying support zones and resistance zones.

Forming and Operating Support Zones:
Even if the inner market dominates (more sell orders), if the price drops to a certain level but cannot go lower, it indicates strong buying interest at that level—forming a support zone. Investors see this as a good entry point for long positions, expecting a rebound.

Forming and Operating Resistance Zones:
Conversely, even if the outer market dominates (more buy orders), if the price cannot break through a certain high point, it indicates a resistance zone. This is often where previous buyers are reluctant to realize losses, and they may sell off when the price approaches this level, creating selling pressure.

Practical Trading Tips:

• Use support zones to consider buying on dips.
• Use resistance zones to consider selling or taking profits.
• Combine these with outer market signals for more accurate timing.