Recently, a friend asked me how to understand the internal and external volume on stock trading software, and I realized that many beginners are actually only vaguely familiar with these two concepts. In fact, understanding the logic behind internal and external volume is quite simple; the key is to figure out who is actively driving the transactions.

Simply put, when you look at stock quotes, the left side shows the prices buyers are willing to pay (bid prices), and the right side shows the prices sellers are willing to sell at (ask prices). If someone is eager to sell stocks and trades directly at the best bid price, this transaction counts as internal volume. Conversely, if someone is eager to buy and trades directly at the best ask price, this counts as external volume. So, a large internal volume indicates strong selling pressure, while a large external volume indicates strong buying momentum.

The five-level quotes display the top five bid and ask prices side by side, with the five bids usually shown in green and the five asks in red. These are pending orders and may not necessarily be executed, so they shouldn't be fully trusted.

What’s truly useful is looking at the ratio of internal to external volume, which is the internal volume divided by the external volume. A ratio greater than 1 indicates that internal volume is larger, suggesting a bearish market sentiment; a ratio less than 1 indicates that external volume is larger, implying bullish sentiment. But there's a trap here: major players can create fake internal and external volume data by placing and then canceling orders, so this indicator alone isn't sufficient.

A more practical approach is to combine support and resistance zones for trading. When a stock falls to a support zone and can't go lower, it indicates that there are buyers willing to purchase at that price, so you might consider going long. Conversely, when a stock rises to a resistance zone and can't break through, it suggests that those who bought at higher prices are trying to unload, so you might consider selling or shorting.

Honestly, though, internal and external volume are only short-term indicators; they can be manipulated easily and don't reflect long-term trends. True investing requires combining volume analysis with technical and fundamental analysis. Relying on a single indicator won't get you far. Many people overlook a company's fundamentals and the overall economic environment, which can lead to being misled by technical signals. So, no matter how you view stocks, you should do your homework and improve your win rate.