Recently, someone in the community asked me what "internal volume" and "external volume" mean, and I realized that many retail investors simply don't understand these two concepts, but they are actually very important and can help you judge short-term capital flow.

In simple terms, the meaning of internal and external volume is to distinguish who is actively driving the transactions. When someone is eager to sell and executes a trade at the bid price, that trade counts as internal volume; conversely, if someone is eager to buy and directly matches the ask price, that trade counts as external volume.

For example, suppose a stock has a bid price of 1160 yuan and an ask price of 1165 yuan. If you are eager to sell now and sell directly at 1160, this trade is recorded as internal volume, indicating sellers are more aggressive. On the other hand, if you are eager to buy and buy directly at 1165, that is external volume, indicating buyers are more aggressive.

Trading software will show five levels of quotes: the green on the left is the top five bid prices (the highest five buy orders), and the red on the right is the top five ask prices (the lowest five sell orders). But note that these are just orders, not necessarily executed trades.

So how do you interpret the internal vs. external volume ratio? It’s calculated by dividing internal volume by external volume. A ratio greater than 1 indicates more internal volume, suggesting a bearish market sentiment; a ratio less than 1 indicates more external volume, suggesting a bullish market sentiment; a ratio equal to 1 means the buying and selling forces are balanced, and the market is in a stalemate.

But here’s an important point: you shouldn’t look at the internal/external volume ratio alone. If external volume is larger than internal volume but the stock price is falling, and the trading volume fluctuates wildly, it could be that the main force is inducing buying—deliberately placing sell orders to attract retail investors to buy, while secretly selling off. Similarly, if internal volume exceeds external volume but the stock price is still rising, it might be that the main force is inducing selling—placing buy orders to trick retail investors into selling, while actually accumulating shares.

From my experience, the most practical use of internal and external volume is combined with support and resistance zones. When the stock price hits a support zone but doesn’t fall further, and external volume is significantly larger than internal volume, it indicates strong buying interest and potential for a long position. Conversely, if the price reaches a resistance zone but can’t break through, and internal volume is larger than external volume, it suggests strong selling pressure, and you should be cautious.

The advantage of internal and external volume is their high immediacy, allowing quick reflection of active buying and selling in the market, and the concept is simple and easy to understand. But the downside is that they can be easily manipulated by big players, and they only reflect short-term activity, making it hard to judge long-term trends. Most importantly, never rely solely on the internal/external volume ratio; it must be used together with trading volume, technical analysis, and fundamental analysis to avoid being misled.

Honestly, no single indicator in financial investment can work perfectly everywhere. While the idea of internal and external volume is simple, to use it well still requires practice and careful market observation. If you want to practice in real trading, you can start with a demo account to gain experience, and after accumulating enough, switch to real money—only then will your win rate improve.