Recently, a friend asked me how to interpret order book data, especially regarding the internal and external order flow. Honestly, many people open trading software and see these numbers but have no idea what they mean. In fact, internal and external order flow are telling you whether buyers or sellers are more aggressive right now.

Simply put, when a trade occurs at the price where buyers have placed their orders, that trade counts as internal order flow, indicating sellers are willing to sell at lower prices. Conversely, a trade at the price where sellers have placed their orders is external order flow, showing buyers are willing to chase prices. So, a large internal order flow suggests the bears are pushing, while a large external order flow indicates the bulls are pushing.

The five-level quotes you see on your broker app visualize this data. The green on the left is the buy orders, the red on the right is the sell orders, with each level showing the price and volume. But be aware, the five levels are just order placements, not guaranteed to execute, and they can be withdrawn at any time.

Regarding the internal/external order flow ratio, this is what short-term traders care about most. The calculation is simple: internal order flow divided by external order flow. A ratio greater than 1 means internal order flow is larger, indicating sellers are more aggressive—usually a bearish signal. A ratio less than 1 means buyers are more eager, signaling bullish sentiment. A ratio equal to 1 suggests a stalemate, with the market consolidating.

But here’s a key point: a large internal order flow doesn’t necessarily mean the stock price will fall. I’ve seen many cases where internal order flow is greater than external, yet the price still rises. Why? Because the market is also influenced by news, sentiment, and fundamentals. Relying solely on the internal/external ratio can easily lead to traps.

In practice, the most important thing is to combine support and resistance zones for trading. When the price hits a level and refuses to go lower, that’s a support zone—large buy orders are waiting, so consider going long. Conversely, if the price rises to a level and can’t break through, that’s a resistance zone—often where those who bought high want to unload.

My trading logic is to trade within these support and resistance zones—buy at support, sell at resistance. But once the price breaks support or surges past resistance, be cautious. That indicates the original buying or selling pressure is insufficient, and the price may continue to fall or rise until hitting the next support or resistance.

Also, be aware of the tactics of big players. Sometimes, you see external order flow larger than internal, and the price should go up, but it stalls or even drops, with sell orders stacking up. This could be the big players placing deceptive sell orders to lure retail investors in, while secretly offloading shares. Conversely, there are also baiting tactics for shorting—placing buy orders to induce selling, then absorbing the stock.

Therefore, the advantage of internal and external order flow data is that it’s real-time, conceptually simple, and combining it with order book and volume data can improve judgment accuracy. But the downside is that it’s easily manipulated, and it only reflects short-term trading behavior, not long-term trends. Relying on it alone can lead to wrong decisions.

My final advice is that the internal/external order flow ratio is just one tool in technical analysis. It shouldn’t be used in isolation. Combining volume, support and resistance levels, fundamentals, and overall market trend will improve your success rate. Especially when internal order flow is large but the price moves strongly in the opposite direction, be extra cautious and analyze the underlying reasons. Proper preparation is key to surviving longer in the market.