Is a price increase when the internal volume exceeds the external volume a trap? Understanding the true secrets behind order book data

Many stock investors notice a strange phenomenon when watching the market: the internal volume (內盤) is greater than the external volume (外盤), yet the stock price still rises. What exactly is going on here? To understand this phenomenon, we need to first clarify the trading logic behind internal volume, external volume, and the internal-external volume ratio, as well as their relationship with support and resistance zones.

Internal and External Volume: Who Is Actively Trading

Before a trade occurs, the market has two types of orders: the seller’s expected asking price and the buyer’s expected bid price. The essence of internal and external volume is to distinguish who is actively driving the transaction.

When a trade occurs at the bid price, it indicates that sellers are willing to accept the buyer’s quote and are eager to exit, and these sell volumes are recorded as internal volume—a bearish signal. Conversely, when a trade occurs at the ask price, it shows buyers are willing to pay a premium to purchase, and these buy volumes are recorded as external volume—a bullish signal.

For example: if the bid side shows 1160 yuan / 1415 lots, and the ask side shows 1165 yuan / 281 lots, an investor might immediately sell 50 lots at 1160 (internal volume), or buy 30 lots at 1165 (external volume). This illustrates the principle.

Level 5 Quotes: The Complete Picture of the Real-Time Order Book

The five-level quotes you see first on your broker app are organized displays of internal and external volume data. The Level 5 bid (usually shown in green) represents the top five highest buy orders, while the Level 5 ask (usually in red) shows the lowest five sell orders.

It’s important to note that these five-level quotes are just order data; they do not guarantee execution—they can be withdrawn at any time.

Calculating and Initial Judgments of Internal-External Volume Ratio

Internal-External Volume Ratio = Internal Volume ÷ External Volume

• Ratio > 1: Internal volume exceeds external volume, indicating sellers are eager to exit, a bearish signal.
• Ratio < 1: External volume exceeds internal volume, indicating buyers are actively chasing prices, a bullish signal.
• Ratio = 1: Buying and selling forces are balanced, and the market is in stalemate.

However, these initial judgments are not enough; short-term trading requires deeper analysis.

The Truth Behind Rising Prices Despite Internal Volume Being Greater Than External Volume

Many novice investors feel confused when they see internal volume greater than external volume but the stock price still rising. There are several possible reasons for this phenomenon:

Main Force Trap: Large players may deliberately place buy orders to attract retail sellers, while secretly accumulating shares. Later, they reverse and push the stock price higher. This manifests as large internal volume but with buy orders from level one to level three continuously stacking, followed by a sudden price surge.

Market Sentiment Shift: Besides trading volume, news, fundamentals, and overall market sentiment can drive price movements. The internal-external volume ratio is just one dimension of data and cannot alone predict future direction.

Support Zone Power: When the stock price falls into a support zone, even if internal volume is large (indicating some selling), enough buying strength can absorb these sell-offs and push the price back up. In this case, large internal volume with rising prices is normal.

Practical Application of Support and Resistance Zones

The internal-external volume ratio works best when combined with support and resistance zones.

At Support Zones: Although internal volume may be larger than external volume, this is a price level where buyers are willing to accumulate. If the price “won’t go down,” it indicates strong buying interest, making it a good opportunity to go long.

At Resistance Zones: Strong buying (external volume > internal volume) that fails to push the price higher and gets blocked at a certain level suggests a large number of trapped positions looking to unload. When the price approaches this level, selling pressure increases, making it a good point to short or take profits.

Practical Strategy:

• Buy when the price drops to a support zone.
• Sell when the price reaches a resistance zone.
• If the price breaks below support or above resistance, a trend often forms until the next support or resistance level is reached.

Advantages and Disadvantages of Internal-External Volume Indicators

Advantages: High real-time responsiveness, updates simultaneously with transactions; simple and easy to understand; when combined with bid-ask orders and volume, can improve short-term judgment accuracy.

Disadvantages: Can be manipulated by large players to create false signals; only reflects current transaction behavior, not long-term trends; using alone can be misleading, so it should be combined with fundamental, technical, and volume analysis.

A Complete Trading Decision Framework

Internal-external volume ratio is just one tool in the technical analysis toolbox, not the whole picture. Mature investment decisions should include:

1. Order Book Analysis: Internal-external ratio, bid-ask structure, volume changes
2. Technical Analysis: Support and resistance zones, key moving averages, breakout patterns
3. Fundamental Analysis: Company financials, industry outlook, economic cycles
4. Market Sentiment: Capital flows, news developments

Only through multi-dimensional comprehensive analysis can traders truly improve their success rate. Remember, there is no perfect indicator—only continuous learning and practice.