Recently, while watching the market, I was asked again about the difference between internal and external volume, so I decided to organize my understanding. Honestly, when I first started trading stocks, these two concepts were indeed easy to confuse, but basically it’s about distinguishing who is more eager to execute the trade.

Let’s start with the five-level quotes, because this is the foundation for understanding internal and external volume. When you open your broker’s app, you should see the green five-level bid on the left and the red five-level ask on the right. These represent the top five highest bid prices and the lowest five ask prices in the market at the moment. The difference between the bid price and the ask price is called the bid-ask spread, and this spread is very important.

Now, here’s the key point. When you want to sell stocks immediately, you can sell at the bid price, which counts as internal volume. Conversely, if you want to buy immediately, you can buy at the ask price, which counts as external volume. Simply put, internal volume indicates that someone is willing to sell at the bid price to meet the buyer’s quote, while external volume being greater than internal volume means buyers are more aggressive and willing to pay higher prices to chase the stock.

The internal-to-external volume ratio is calculated by dividing internal volume by external volume. A ratio greater than 1 indicates more internal volume, suggesting a bearish market sentiment with sellers lowering prices; a ratio less than 1 indicates more external volume, meaning buyers are chasing prices, and when external volume exceeds internal volume, it’s a bullish signal. A ratio equal to 1 indicates a stalemate between bulls and bears.

But here’s something to note: having external volume greater than internal volume doesn’t necessarily mean the stock price will rise. I’ve fallen into this trap myself. Sometimes, external volume is obviously larger than internal volume, yet the stock price remains flat or declines. This could be because the main force is inducing buying, using order placements to attract retail investors, while secretly selling off. Conversely, if internal volume exceeds external volume but the price rises, it might be the main force inducing short positions, actually accumulating shares. So, just looking at the internal/external volume ratio can be very misleading.

My current approach is to combine internal and external volume with support and resistance zones. When the price drops to a support zone, even if internal volume > external volume, if there’s a clear accumulation of buy orders, it might be a good time to consider going long. When the price rises to a resistance zone, and external volume > internal volume but sell orders keep increasing, that’s a warning sign. The key is to observe whether the order book structure is changing; just looking at the ratio alone can easily deceive you.

Honestly, internal and external volume do have advantages: they are timely and conceptually simple, but they can also be manipulated by big players. I now prefer to combine volume, candlestick patterns, and fundamental analysis. Relying solely on the internal/external volume ratio can lead to wrong directions. Especially for short-term trading, market sentiment changes quickly, and the same signal can have completely different implications in different environments.

So, if you’re a beginner, first understand the basic logic of internal and external volume, but don’t overly rely on this indicator. Practice more, observe more, and over time you’ll start to feel the rhythm of the market.