Recently, I’ve been chatting with some investment friends and found that many people are still a bit confused about the two data points—internal and external volume—on trading software. Honestly, when I first started short-term trading, I was the same, but I later realized these two indicators are actually super important because they can directly reflect who is more eager in the market—buyers or sellers.

Let’s start with the core logic. When stocks are traded, there are basically two situations: either the buyers actively raise their bids to chase the price, or the sellers directly lower their prices to sell off. When the transaction occurs at the bid price, that volume is recorded as internal volume, indicating sellers are more eager to unload; conversely, when the trade happens at the ask price, that volume is external volume, showing buyers are eager to enter. Simply put, a large internal volume indicates more bearish sentiment, while a large external volume suggests bullish sentiment and active buying.

At this point, I have to mention the five-level bid and ask quotes. This is probably the first thing every Taiwanese investor sees when opening their broker app. The green on the left shows the top five bid prices, representing the five highest buy orders; the red on the right shows the top five ask prices, representing the five lowest sell orders. By looking at these orders, you can roughly gauge the market’s buying and selling intentions. But note that these five levels only show pending orders, which may not necessarily execute—people can cancel orders at any time.

So, how do you interpret the internal and external volume ratio? It’s simple: divide internal volume by external volume. A ratio greater than 1 indicates more internal volume, suggesting high bearish sentiment and a potential downtrend; a ratio less than 1 indicates more external volume, showing strong bullish sentiment and usually considered a bullish signal; a ratio equal to 1 means the buying and selling forces are balanced, and the market is in a stalemate.

But I must especially remind you that relying solely on internal and external volume can be risky. For example, sometimes external volume appears larger than internal volume, but the stock price doesn’t rise—in fact, it falls. This is a sign of a so-called false rally. Major players might deliberately place sell orders to lure retail investors into buying, while secretly offloading shares. Conversely, if internal volume is larger but the price still rises, it could be a fake bearish signal—major players might be accumulating shares. Therefore, internal and external volume indicators are easily manipulated and should be used in conjunction with other factors.

From my own trading experience, I find that the most useful way to use internal and external volume is together with support and resistance zones. When the stock price drops to a certain level and refuses to go lower, that’s a support zone—usually indicating many are willing to buy at that price. Conversely, if buying pressure can’t push through a certain level, that’s a resistance zone. The strategy then is to buy near support and sell near resistance, making profits from the price difference. Once the stock breaks below support or above resistance, it signals the start of a trending move.

Honestly, internal and external volume do have advantages—high immediacy, simple concept, and when combined with bid/ask orders and volume, they can improve short-term trend predictions. But they also have clear drawbacks: they can be manipulated, only reflect short-term movements, and can be distorted if used alone. That’s why I always emphasize that no single indicator can do everything in financial investing. Internal and external volume are just part of technical analysis; fundamental factors and economic conditions must also be considered.

In summary, understanding what internal and external volume mean, combined with support/resistance zones and other technical indicators, can help you more accurately judge market trends. If you want to practice, you can try using a demo account to experience real trading—this will deepen your understanding of internal and external volume. After all, there are no shortcuts in investing; it’s about observing more, practicing more, and reflecting more to gradually improve your success rate.