Recently, I found that many stock market beginners are asking me the same question: what do the bid and ask volumes on the trading software actually mean? In fact, these two indicators are really important, as they can help you quickly judge the buying and selling strength of the market, and even see the short-term capital flow trends.

Let's start with the basics. When a stock is traded, it's actually a battle between buyers and sellers. Sellers want to raise the price and place sell orders at higher prices, while buyers want to lower the price and place buy orders at lower prices. When a transaction occurs at the bid price, we record it as the internal volume, indicating that sellers are more eager to offload; conversely, if the transaction happens at the ask price, it's recorded as the external volume, indicating that buyers are willing to chase the price and buy in. Simply put, more internal volume signals bearish sentiment, while more external volume signals bullish sentiment.

For example, TSMC's bid order book shows 1,415 lots at 1160 yuan, and the ask price is 1,165 yuan with 281 lots. If you want to sell immediately, you can place an order at 1160 yuan and sell 50 lots, which counts as internal volume. Conversely, if you want to buy immediately, you can place an order at 1165 yuan and buy 30 lots, which counts as external volume.

The five best bid and ask prices you see at a glance on your broker's app are actually composed of internal and external volumes. The green five bid prices on the left are the top five highest bid prices, and the red five ask prices on the right are the lowest five ask prices. These are just pending orders and may not necessarily be executed.

So how do you interpret the ratio of internal to external volume? It's calculated by dividing the internal volume by the the external volume. A ratio greater than 1 indicates more internal volume, suggesting high bearish sentiment, which is a bearish signal; a ratio less than 1 indicates more external volume, suggesting stronger bullish sentiment, usually seen as a bullish signal; a ratio equal to 1 means the buying and selling forces are balanced, and the market is in consolidation.

But there's an important point to note here. Relying solely on internal and external volume can be manipulated by big players. For example, large traders might deliberately place large buy orders to lure retail investors into selling, while secretly accumulating shares—this is known as a bear trap. Or they might place large sell orders to induce retail investors to buy, while secretly selling off shares—this is known as a bull trap. Therefore, if external volume exceeds internal volume but the price doesn't rise, or internal volume exceeds external volume but the price doesn't fall, you should be especially cautious.

A more advanced approach is to combine internal and external volume with support and resistance zones. When the price drops to a certain level and can't go lower, many traders are willing to buy at that level—this is a support zone. Conversely, when the price rises to a certain level and gets stuck, that's a resistance zone. The most practical strategy is to buy near support zones and sell near resistance zones.

The advantage of internal and external volume is their high immediacy, allowing the fastest reflection of active buying and selling in the market, and the concept is simple and easy to understand. However, their drawbacks are also obvious—they can be manipulated easily, and they only reflect short-term trading behavior, making it hard to judge long-term trends. Therefore, never rely solely on internal and external volume for trading; they should be used together with trading volume, technical analysis, and fundamental analysis.

Ultimately, no single indicator can dominate all market conditions. Internal and external volume are just parts of technical analysis. Combining them with company fundamentals and the overall economic environment can truly improve your winning chances. It's recommended to practice with a demo account to experience real trading markets.