What do inner and outer markets really mean? A trader must understand the secret codes of the order book

Many newcomers to the stock market often get overwhelmed by a bunch of numbers, especially those bizarre terms on trading software—Inner Volume, Outer Volume, and the Inner/Outer Volume Ratio. These seemingly complex indicators actually tell you one thing: Who is more eager to execute a trade? The buyers or the sellers?

If you can interpret this signal, it means you’ve grasped the pulse of short-term capital flow.

Understanding “Who Initiates the Trade”

The essence of stock trading is simple: buyers want to lower the price, sellers want to raise it. Both sides tug at the price until a deal is made at a certain point.

The key question is—Who is willing to make concessions?

When someone is eager to sell, the transaction occurs at the Bid Price (matching the buyer’s order), and this volume counts as Inner Volume. This indicates a seller’s active attitude, wanting to exit quickly, which is a bearish signal.

Conversely, when someone is eager to buy, the transaction occurs at the Ask Price (pursuing the price upward), and this volume counts as Outer Volume. This shows a buyer’s urgency, willing to pay more to buy, which is a bullish signal.

For example: Suppose TSMC posts a bid of 1160 yuan for 1415 shares, and an ask of 1165 yuan for 281 shares.

If you immediately sell 50 shares at 1160 yuan, because you’re matching the bid order, this volume counts as Inner Volume (seller actively matching).

If another person immediately buys 30 shares at 1165 yuan, because they’re chasing the price, this volume counts as Outer Volume (buyer actively matching).

The meaning of Inner and Outer Volume is simple—Inner Volume indicates selling pressure, Outer Volume indicates buying strength.

The Five-Level Quote: Instantly See the Buyer-Seller Power Balance

Open any brokerage app, and what catches your eye is the Five-Level Quote—the market’s real-time top five bid and ask prices.

On the left in green is the Top 5 Bids (the five highest bid prices), and on the right in red is the Top 5 Asks (the five lowest ask prices).

For example, Bid 1 is 203.5 yuan for 971 shares, meaning the highest bid in the market is willing to buy at 203.5 yuan for 971 shares; Ask 1 is 204.0 yuan for 350 shares, meaning the lowest ask is willing to sell at 204.0 yuan for 350 shares.

Note: The five-level quotes only show pending orders, which can be withdrawn at any time, and do not guarantee a trade will happen.

However, the structure of these quotes reveals trader sentiment—order sizes, price gaps, and distribution all expose the true market psychology.

How to Read the Inner/Outer Volume Ratio Effectively?

The ratio is calculated as:

Inner/Outer Volume Ratio = Inner Volume ÷ Outer Volume

• Ratio > 1: Inner volume exceeds Outer volume, indicating strong selling pressure, market sentiment is bearish, a sign of distribution
• Ratio < 1: Outer volume exceeds Inner volume, indicating strong buying interest, market sentiment is bullish, accumulation
• Ratio = 1: Balanced forces, market is in stalemate, trend direction is unclear

But here’s a harsh truth: Relying solely on the Inner/Outer Volume Ratio is not enough.

What the Inner/Outer Volume Ratio Cannot Tell You—The Main Player’s Deception Guide

Short-term traders know that big players often create fake signals to lure retail investors.

Fake Bullish Signal: Outer Volume looks large, but the stock price doesn’t move up or even drops

Be cautious here. The main players might be placing large sell orders at levels one to three to induce retail investors to chase the price (creating fake outer volume), then quietly offloading shares at the bottom. On the surface, outer volume spikes, but it’s a trap.

Fake Bearish Signal: Inner Volume looks large, but the stock price doesn’t fall or even rises

The reverse logic applies. Big players might be stacking buy orders at levels one to three to create a false impression of accumulation, enticing retail investors to sell (creating fake inner volume), while secretly accumulating shares. The apparent heavy sell pressure is a deception.

This is why relying solely on the Inner/Outer Volume Ratio is extremely risky.

Combining Volume and Price Position for True Insight

For the ratio to be meaningful, it must be combined with:

Outer Volume > Inner Volume + Price Rising + Volume Expanding

This indicates healthy bullish momentum. Buyers are actively pushing the price higher, with volume increasing, showing strong market consensus.

Inner Volume > Outer Volume + Price Falling + Volume Expanding

Similarly, this signals healthy bearish momentum. Sellers are actively offloading, the price is declining, and volume is rising, reflecting a clear bearish consensus.

Outer Volume > Inner Volume but Price is Flat or Not Rising, with Volume Fluctuating

When outer volume is significantly larger than inner volume, but the price remains stagnant or even declines, and ask orders at levels one to three keep increasing, beware. It might be a manipulation by big players creating a false sense of buying enthusiasm while secretly distributing shares.

Support and Resistance Zones: The Ultimate Application of Inner/Outer Volume Ratio

Instead of obsessing over the raw numbers, focus on Support Zones and Resistance Zones.

Support Zone is a price level where the stock tends not to fall below, often because many traders see it as a bargain and are willing to buy. Even if inner volume temporarily exceeds outer volume (more sell pressure), the buyers’ defense is strong, making further decline difficult.

Resistance Zone is where the stock faces selling pressure during an uptrend. Usually, previous buyers at this level want to exit, creating overhead supply. Even if outer volume exceeds inner volume (buying strength), if the price can’t break through, it will keep facing resistance.

Practical strategy:

• Buy when the price hits the support zone
• Short when the price hits the resistance zone
• Trade back and forth between these zones to profit from the spread

Once the stock breaks below support or above resistance, it signals a trend reversal—either a downtrend to the next support or an uptrend to the next resistance.

Advantages and Traps of the Inner/Outer Volume Ratio

Advantages:

• Real-time updates synchronized with trades
• Simple concept, easy for beginners to grasp
• When combined with order book structure and volume, very helpful for short-term trend judgment

Traps:

• Easily manipulated by big players; fake signals can be created through order placement, cancellation, and re-entry
• Only reflects current state, cannot predict long-term trends
• Relying on it alone can lead to distortions; must be used with other indicators

Key Reminder

Many people treat the Inner/Outer Volume Ratio as a universal indicator, but this is a risky habit prone to failure.

Inner and Outer Volume essentially record “who is more eager,” but market movements are influenced by multiple factors—sentiment, news, fundamentals. Why does a stock sometimes move counter to the volume signals (large inner volume but rising price, large outer volume but falling price)? It’s often because other more important factors are being ignored.

True trading masters don’t rely on a single indicator. They build a comprehensive decision system: technical analysis for positioning, fundamentals for trend judgment, capital flow for validation. The Inner/Outer Volume Ratio is just one tool in this system, not the whole picture.

If you’re still struggling to choose trading tools, try practicing with a demo account. Without risking real capital, you can freely experiment with various indicator combinations to find the trading logic that suits you best.

Remember: mastering the meaning of Inner and Outer Volume is just the first step. The real key is understanding market psychology and cultivating your trading discipline.