How to accurately grasp the internal and external volume ratio — the key to understanding order book buying and selling strength

When we open stock trading software, besides basic data such as opening price, highest, and lowest prices, we also see indicators like “Inner Volume,” “Outer Volume,” and the “Inner-Outer Volume Ratio.” These seemingly complex concepts are actually intuitive representations of the strength comparison between buyers and sellers in the market, and are essential market language for short-term traders. Today, let’s comprehensively understand the logic behind the Inner-Outer Volume Ratio from a practical perspective.

Understanding Market Depth from the Five-Order Quote

To understand the Inner-Outer Volume Ratio, first, you need to recognize the five-order quote. The five-order quote is what you see immediately upon opening your broker app. On the left, marked in green, is the “Buy Five-Order”—representing the top 5 buy orders with the highest bid prices. On the right, marked in red, is the “Sell Five-Order”—representing the top 5 sell orders with the lowest ask prices.

For example, “1160 yuan / 1415 shares” on the buy side indicates there are 1,415 shares waiting to be bought at 1160 yuan. “1165 yuan / 281 shares” on the sell side indicates there are 281 shares willing to be sold at 1165 yuan. However, note that the five-order quote only reflects pending orders; actual transactions may not occur unless the orders are matched, and investors can withdraw orders at any time.

How to Distinguish Inner Volume and Outer Volume

The essence of inner and outer volume is to differentiate “who actively pushed the transaction.” The key to understanding this is grasping the concepts of “Bid Price” and “Ask Price”—sellers want to raise prices, buyers want to lower prices, creating a confrontation between the two sides.

When a trade occurs at the bid price, this transaction is recorded as “Inner Volume,” indicating that sellers are actively accommodating buyers and aggressively selling, reflecting the initiative of the bears. Conversely, when a trade occurs at the ask price, it is recorded as “Outer Volume,” indicating that buyers are eager to chase prices and actively bid higher, reflecting the initiative of the bulls.

For example, if an investor wants to sell immediately, they place an order at the bid price of 1160 yuan and execute 50 shares; these 50 shares are counted as Inner Volume. If they want to buy immediately, they place an order at the ask price of 1165 yuan and execute 30 shares; these 30 shares are counted as Outer Volume.

Calculation and Application of the Inner-Outer Volume Ratio

Inner-Outer Volume Ratio = Inner Volume ÷ Outer Volume

• When the ratio is greater than 1, it indicates that Inner Volume exceeds Outer Volume, suggesting market bearish sentiment intensifies, with sellers eager to exit—often a bearish signal.
• When the ratio is less than 1, it indicates that Outer Volume exceeds Inner Volume, with buyers actively pushing prices higher—often a bullish signal.
• When the ratio equals 1, it suggests a balance of power, and the market is in stalemate, requiring further signals for clarity.

However, simply looking at the ratio number is not enough. It must be combined with the stock price position, volume fluctuations, and order book structure to make accurate judgments:

• When Outer Volume > Inner Volume and the stock price is rising, it confirms that buyers are actively entering the market and driving the price up—this is a solid bullish signal. If volume increases simultaneously, the upward momentum is even stronger.
• When Inner Volume > Outer Volume and the stock price is falling, it indicates sellers are actively unloading and pushing the price down—this is a solid bearish signal. Larger volume during the decline indicates greater downward pressure.

But beware of “Fake Bullish” phenomena: when Outer Volume is significantly larger than Inner Volume, yet the stock price does not rise but falls, or volume fluctuates wildly. This could be a manipulation by major players placing sell orders to induce retail investors to buy, while secretly selling off. For example, during sideways consolidation, Outer Volume data may look strong, but if the sell orders at levels one to three continue to increase, the price may suddenly plunge afterward.

Similarly, watch out for “Fake Bearish” signals: when Inner Volume exceeds Outer Volume, but the price continues to rise. This could be a tactic by major players placing buy orders to induce retail investors to sell, while quietly accumulating positions. For instance, if the price slightly rises, Inner Volume surpasses Outer Volume, but buy orders at levels one to three keep stacking, and the price continues upward.

These “false signals” occur because the market is also influenced by sentiment, news, and fundamentals. The core of technical analysis is to predict future trends based on price and volume movements.

Practical Application of Support and Resistance Zones

Besides observing the balance of buying and selling forces, technical analysis emphasizes identifying support and resistance zones.

When Inner Volume > Outer Volume, sellers are indeed more eager, but if the price drops to a certain level and then refuses to go lower, it indicates substantial funds are willing to absorb at that price—forming a “Support Zone.” These buyers believe the price is sufficiently low and expect a rebound, so investors might consider going long in this area.

Conversely, when Outer Volume > Inner Volume and buying momentum is strong, but the price cannot break through a certain level, it forms a “Resistance Zone.” Resistance zones are often previous accumulation areas—investors who bought at high levels are reluctant to sell at a loss but also do not want to hold long-term. When the price approaches their cost, they rush to sell to cut losses. The heavier the selling pressure, the fewer willing to buy, and if the price fails to break through, the resistance level may turn into a new support or become a barrier.

Practical strategy involves trading within these support and resistance zones: buying near support zones when the price dips, selling near resistance zones when the price rises; or shorting at resistance zones and going long at support zones. But if the price breaks below support or surges past resistance significantly, it indicates that the absorbing orders cannot handle the selling or buying pressure, and the price will likely continue in that direction until it finds the next support or resistance.

Limitations of the Inner-Outer Volume Ratio

Inner and outer volume data have the advantage of real-time updates—they reflect the active buying and selling behavior simultaneously with transactions, providing quick insights into market sentiment; easy to grasp without complex calculations; and when combined with order book and volume analysis, can improve short-term trend predictions.

However, their disadvantages are also evident. Major players can manipulate the data through “placing orders → active transactions → canceling orders,” creating false signals. Relying solely on this can lead to pitfalls. Inner and outer volume reflect only current transaction behavior and do not reveal long-term trends. Most importantly, any indicator used in isolation can be distorted; it must be combined with volume, technical analysis, and fundamental analysis for a comprehensive view.

Summary

The Inner-Outer Volume Ratio is a powerful tool to gauge the strength of buyers and sellers, helping investors quickly assess the urgency of each side. When Inner Volume exceeds Outer Volume, it indicates sellers are eager to exit, increasing the risk of price decline; when Outer Volume exceeds Inner Volume, it suggests buyers are actively entering, increasing the likelihood of price rise. However, no single indicator can guarantee success—market conditions are influenced by fundamentals and macroeconomic factors. The Inner-Outer Volume Ratio is just one part of technical analysis. Successful investing requires considering company fundamentals and macro trends to truly improve win rates.