What do the internal and external orders in trading software really mean? A must-know order book secret for retail investors

Open the trading software, and the dense numbers on the five levels of quotes can be overwhelming, especially the data labeled “internal market” and “external market.” Many investors simply can’t tell what these indicators are telling them. In fact, they hide the true intentions of buyers and sellers in the market—who is more anxious, who is chasing prices, who is cutting prices. Learning to read the internal and external markets will allow you to anticipate short-term capital movements in advance.

How to read the five levels of quotes? The complete logic from bid to ask

Opening any stock trading software, the most intuitive display is the five levels of quotes. Usually, the left side shows the green five levels of buy orders, and the right side shows the red five levels of sell orders. What do these numbers represent?

The buy five levels display the top 5 highest bid prices in the market—that is, the buy orders placed by buyers, indicating how many shares they want to buy at this price. The sell five levels are the lowest ask prices—indicating the prices and quantities sellers are willing to sell at.

For example, if you see “Bid 1 203.5 yuan / 971 shares,” it means the highest bid in the market is 203.5 yuan, with 971 shares wanting to buy. Correspondingly, “Ask 1 204.0 yuan / 350 shares” indicates the lowest ask is 204.0 yuan, with only 350 shares available to sell.

But here’s a key point: the five levels of quotes show unfilled orders, which can be withdrawn at any time. They are not guaranteed to be executed.

The essence of internal and external markets: Who is actively chasing prices?

The core logic of internal and external markets is actually very simple—distinguish whether buyers or sellers are more eager.

When an investor wants to sell immediately and doesn’t want to wait, and executes at the “Bid 1” price, this is the seller actively accommodating the buyer. This transaction volume is recorded as internal market, indicating that the seller is more anxious, willing to lower prices or even cut prices, signaling a bearish sentiment. Conversely, when the bid volume exceeds the ask volume, the internal market volume is usually smaller.

On the other hand, if an investor wants to buy immediately and directly executes at the “Ask 1” price or higher, the buyer is actively chasing the price. This transaction volume is recorded as external market, showing that buyers are very aggressive, unafraid of chasing high, usually indicating stronger bullish momentum. When the bid volume exceeds the ask volume, the buy orders are abundant, and the external market tends to enlarge.

A concrete example makes this clearer: TSMC’s quote at a certain moment is “Bid 1160 yuan / 1415 shares, Ask 1165 yuan / 281 shares.” If an investor immediately sells 50 shares at 1160 yuan, these 50 shares are part of the internal market. If another investor immediately buys 30 shares at 1165 yuan, these 30 shares are part of the external market.

What is the internal vs. external market ratio? How to judge buying and selling strength?

Compare the transaction volumes of the internal and external markets to get the internal-external market ratio:

Internal-External Market Ratio = Internal Market Volume ÷ External Market Volume

• Ratio > 1: Internal market volume exceeds external market volume, indicating sellers are more active, bearish sentiment is spreading, and the market leans toward the downside.
• Ratio < 1: Internal market volume is less than external market volume, indicating buyers are more active, bullish sentiment is strong, and it’s a bullish signal.
• Ratio = 1: The buying and selling forces are balanced, the market is in stalemate, and the future direction is uncertain, requiring new signals.

But note—this ratio only reflects current transaction behavior; relying solely on it can lead to misjudgment.

Combining internal/external markets with price and volume to see the truth

Smart investors don’t just look at the internal-external ratio but analyze it together with price trends, volume, and order book structure:

External market > internal market, and price is rising → Buyers are actively pushing the price higher, a healthy bullish signal. If volume also increases, the short-term upward momentum is even stronger.

Internal market > external market, and price is falling → Sellers are actively unloading, driving the price down, a healthy bearish signal. If volume increases, the short-term downward pressure is greater.

External market > internal market but price is flat or falling, with volume fluctuating → This could be a false bullish trap. The main players are deliberately placing sell orders to attract retail buyers (creating external market), while secretly selling off. Common scenarios include price consolidation, with external market volume significantly larger than internal, but ask orders from ask 1 to ask 3 keep increasing, eventually leading to a sharp drop.

Internal market > external market but price is rising instead of falling, with volume fluctuating → This could be a false bearish trap. Main players are deliberately placing buy orders to lure retail into selling low (creating internal market), while secretly accumulating. For example, the price slightly rises, internal market volume exceeds external, but buy orders from bid 1 to bid 3 keep piling up, and then the price continues to rise.

Investors should be alert to these “counter-signal” scenarios, because besides transaction volume, market sentiment, news, and fundamentals also influence the market.

Support and resistance zones: advanced application of internal/external market ratio

In technical analysis, you’ll find that support and resistance zones are even more important than the internal-external ratio.

Support zone is a price range where the stock tends not to fall below after dropping to that level. Although a higher internal market suggests sellers are active, when the price hits a support zone, many buyers see it as a bargain and step in, creating strong buying support. This is a good opportunity to go long.

Resistance zone is the opposite. When external market buying is strong but the price is stuck at a certain level, it forms a resistance zone. Usually, this is where previous high-cost buyers are reluctant to sell at a loss. When the price approaches this level, they start selling to cut losses, blocking further upward movement.

Practical trading strategies:

• Buy when the price drops to the support zone
• Sell or short when the price reaches the resistance zone
• Repeatedly trade within these zones, buying low and selling high

But once the price breaks below the support zone or above the resistance zone, the situation changes dramatically. It indicates that the buying or selling pressure has exceeded expectations, often leading to a one-way trend—either a continuous decline until the next support or a continuous rise until the next resistance.

The advantages and traps of internal and external markets

Advantages:

• Real-time reflection, synchronized with transactions, quickly revealing the initiative of buyers and sellers
• Simple concept, easy for beginners to grasp
• When combined with bid/ask orders and volume analysis, greatly improves short-term trend judgment accuracy

Disadvantages:

• Easily manipulated by major players. Through placing, executing, and withdrawing orders, they can create false internal/external market data
• Only reflect short-term transactions, not long-term trend
• Relying on it alone can lead to wrong decisions; must be combined with volume, technical analysis, and fundamentals

Conclusion: internal and external markets are just auxiliary tools; comprehensive analysis is the key

The internal and external markets essentially measure who is more eager in buying and selling. A larger internal market indicates sellers are cutting prices, while a larger external market indicates buyers are chasing prices. But real investment decisions cannot rely on a single indicator.

Stock price movements are influenced by multiple factors—technical internal/external ratio, support and resistance zones, company fundamentals, macroeconomic data, and market sentiment all play roles. When bid volume exceeds ask volume, you may see buying momentum, but if the company’s fundamentals are weak, buying power may not hold.

Therefore, mastering technical analysis (reading internal/external markets, identifying support and resistance zones), paying attention to fundamentals and economic factors, and implementing proper risk management will improve your investment success rate. The dense numbers in the order book ultimately tell one story—the market’s bullish and bearish sentiment, and who has the speaking right now.