Recently, a friend asked me what "internal volume" and "external volume" mean in trading software. That made me realize that many novice investors are still a bit confused about these basic concepts. To be honest, these data may seem complicated, but once you understand them, they can really help you judge short-term capital movements and even predict upcoming trends.

Let's start with the most basic. What does internal volume mean? Simply put, it refers to transactions that occur at the bid price. Imagine the seller is eager to exit, and they sell directly at the price the buyer has posted; this transaction is recorded as internal volume. Conversely, if the buyer is impatient and raises the bid to match the seller's price, this is called external volume. So, internal volume indicates sellers are more eager, and external volume indicates buyers are more eager. Through this logic, you can understand who is driving the stock price in the market.

When I look at the market, I pay most attention to the five-level bid and ask quotes. The green on the left is the five best bid levels, and the red on the right is the five best ask levels. This is almost the view everyone sees when opening their brokerage app. But note that these five levels only show pending orders; they may not necessarily execute. Orders can be withdrawn at any time, so don’t rely solely on this.

What’s truly useful is the ratio of internal to external volume. It’s simply calculated as internal volume divided by external volume. When internal volume exceeds external volume, it indicates a more bearish sentiment in the market, with sellers pushing prices down, which is usually a bearish signal. Conversely, if external volume exceeds internal volume, meaning buyers are chasing prices, it’s a bullish signal. When both are close, the market is in a stalemate, and you need to wait for clearer signals.

But there’s a trap to avoid here. I’ve seen many cases where external volume looks large, but the stock price doesn’t rise—instead, it falls. Or internal volume is large, but the price still goes up. This could be the main players playing tricks, using pending orders to lure retail investors, while secretly operating in the opposite direction. So, understanding what internal volume means is important, but you should never rely on this indicator alone.

Combining support and resistance zones yields better results. When the stock price drops to a certain level and can’t go lower, it indicates strong buying interest at that price—this is a support zone. Conversely, when the price rises to a certain level and gets stuck, that’s a resistance zone. My own trading strategy is to trade within these two zones—buy at support and sell or short at resistance.

The advantage of internal and external volume is that they are highly real-time, with data updating simultaneously with transactions, and the concepts are not complicated. But the downside is obvious: they can be easily manipulated by big players and are only useful for short-term analysis; they don’t help in judging long-term trends. Therefore, I recommend combining internal/external volume with trading volume, technical analysis, and fundamental analysis. Never rely on them alone.

Ultimately, there are no silver bullets in financial investing. The internal/external volume ratio is just one tool in your technical analysis toolbox. You also need to understand a company’s fundamentals, changes in the macroeconomic environment, and be well-prepared to truly improve your win rate. If you have time, practicing with a demo account can help you develop a better feel for the market more quickly.