Understanding Internal and External Orders: How to Use Internal and External Order Ratios to Judge Stock Market Buying and Selling Momentum?

The Core Logic of Internal and External Orders: Who is More Anxious to Execute?

In stock trading, internal and external orders essentially answer a question: Who is more proactive—buyers or sellers?

When you open your trading software, you’ll see two quotes: bid prices and ask prices. Imagine if sellers are eager to sell, they will execute transactions at the bid price, and these trades are considered “internal” (内盘); conversely, if buyers are eager to buy and willing to pay higher than the bid to match the ask price, these trades are considered “external” (外盘).

Simply put:

• Large internal volume = Sellers eager to sell = Bearish signal
• Large external volume = Buyers eager to buy = Bullish signal

For example, TSMC’s bid is 1160 yuan for 1,415 lots, and the ask is 1165 yuan for 281 lots. If an investor immediately sells 50 lots at 1160 yuan, these 50 lots enter the internal order book; if another investor immediately buys 30 lots at 1165 yuan, these 30 lots enter the external order book.

Level 5 Quotes: The First Lens for Market Trading

Level 5 quotes are the interface you see first when opening your broker app—the left side shows the top five bid prices (highest bids), in green; the right side shows the top five ask prices (lowest asks), in red.

Bid price is the highest current offer in the market, ask price is the lowest. The smaller the bid-ask spread, the better the market liquidity. Note that, Level 5 quotes are just order book information and may not necessarily execute—orders can be canceled at any time.

Internal and External Order Ratios: Market Sentiment Behind the Numbers

Internal-External Ratio = Internal Volume ÷ External Volume

This ratio directly reflects the market’s bullish or bearish strength:

Ratio > 1: Internal volume exceeds external volume, sellers are eager to offload, indicating a bearish outlook with short-term downward pressure

Ratio < 1: External volume exceeds internal volume, buyers are actively entering, indicating a bullish outlook with strong short-term upward momentum

Ratio = 1: Bulls and bears are balanced, the market is in stalemate, direction is unclear, and more definitive signals are needed

Short-term Trading: How to Profit from Internal and External Ratios?

The most practical use of the internal-external ratio is combining it with price movement. Watch for these scenarios:

External > Internal, price rises → Buyers actively pushing prices higher, a healthy bullish signal. If volume also increases, short-term upward momentum is stronger.

Internal > External, price falls → Sellers actively offloading, a healthy bearish signal. If volume increases, downward pressure is greater.

External > Internal but price drops or stays flat → Beware of “false bulls,” where major players may use buy orders to lure retail traders while secretly selling.

Internal > External but price rises → Beware of “false bears,” where major players use sell orders to lure short positions while secretly accumulating.

Techniques for Combining Internal-External Ratios with Support and Resistance Levels

Support Zone Strength: When the price drops to a certain level and stops falling, it indicates sufficient buying power at that price. If at this point internal volume exceeds external volume but the price stabilizes, it suggests that although sellers are active, buyers are enough to absorb the selling—consider going long at support.

Resistance Zone Test: When the price rises and encounters resistance at a certain level, it indicates a resistance zone. If external volume exceeds internal volume but the price cannot break through, it shows heavy selling pressure above. Consider shorting at resistance.

Practical Trading Tips:

• Buy at support zones, sell at resistance zones
• Short at resistance zones, close positions at support zones

If the stock breaks below support or breaks above resistance, it signals a trend initiation—usually a strong move down or up until the next support or resistance level.

Advantages and Limitations of Internal and External Order Data

Advantages:

• Real-time updates synchronized with transactions
• Easy to understand and quick to grasp
• Combining order book structure and volume can improve short-term judgment accuracy

Limitations:

• Easily manipulated by major players (through placing, canceling, and executing fake orders)
• Only reflects current transaction status, cannot predict long-term trends
• Using alone can be misleading; should be combined with volume, technical analysis, and fundamentals

Conclusion

The internal-external ratio is an important tool for understanding market buying and selling strength, but it is only one part of technical analysis. Truly skilled traders combine the internal-external ratio, volume, support and resistance levels, and fundamental analysis to improve their win rate. Remember: No single indicator can dominate the market; a combined approach is the key to success.