Order Book Reading Technique: How to Operate When Buy Orders Are Greater Than Sell Orders?

When looking at stock trading software, you’ll always see a bunch of numbers that can be overwhelming. Besides opening price, high and low prices, there are also concepts like “internal volume” and “external volume” that are easy to confuse, along with the common phrase in investment communities, “internal vs. external volume ratio.” What do these data actually tell us? In fact, they are the keys to understanding the order book, helping you quickly judge short-term capital flow and buying/selling momentum.

Who Is Driving the Stock Price? The Truth About Internal and External Volume

Behind every trade in stocks, there is a story of “主动买” (active buying) and “主动卖” (active selling). Before a trade occurs, there are two types of orders in the market—【pending orders】and【real-time executed orders】. The core difference between internal and external volume lies in: who is more eager to complete the transaction.

Sellers want to raise the price, so they place “ask orders”; buyers want to push down the price, so they place “bid orders.” When a stock trades at the bid price, it indicates that sellers are willing to lower prices to meet buyers, and this trade counts as internal volume, representing more aggressive sellers. Conversely, if the trade occurs at the ask price, buyers are willing to pay more to chase the price, and this trade is counted as external volume, indicating strong buying pressure.

For example: a stock has a bid of 1160 yuan with 1,415 lots, and an ask of 1165 yuan with 350 lots. If an investor immediately sells at 1160 for 50 lots, these 50 lots go into internal volume—sellers actively compromise. Conversely, if an investor immediately buys at 1165 for 30 lots, these 30 lots go into external volume—buyers actively chase the price.

How to Read the Five-Level Quote?

Opening your broker app, the first thing you see is the five-level quote. The green on the left is the top five bid levels (the highest five buy orders in the market), and the red on the right is the top five ask levels (the lowest five sell orders). It shows the current order book status of both buyers and sellers.

For example, bid one is 203.5 yuan / 971 lots, indicating the highest bid in the market; ask one is 204.0 yuan / 350 lots, the lowest ask. Note that the five-level quote only shows pending orders, not necessarily executed trades, and these can be withdrawn at any time.

What Does the Internal vs. External Volume Ratio Tell You?

Short-term traders are most concerned with whether the trade volume is on the internal or external side. The internal/external volume ratio is simply defined as:

Internal/External Volume Ratio = Internal Volume ÷ External Volume

• Ratio > 1: Internal volume exceeds external volume, indicating sellers are eager to lower prices, market sentiment is bearish, a bearish signal.
• Ratio < 1: Internal volume is less than external volume, buyers are eager to chase prices, market sentiment is bullish, a bullish signal.
• Ratio = 1: The buying and selling forces are balanced, the market is in consolidation, and the trend is unclear—wait for clearer signals.

Practical Scenarios: How to Use the Internal/External Volume Ratio?

Knowing the ratio is just the first step. Combining it with the stock price position, trading volume, and order book structure when bid orders are larger than ask orders is the real skill.

Healthy Bullish Signal

External volume > Internal volume and the stock price is rising—buyers are actively entering the market to push the price up, indicating genuine bullish momentum. If trading volume also increases, the short-term upward momentum is even stronger.

Healthy Bearish Signal

Internal volume > External volume and the stock price is falling—sellers are actively offloading, driving the price down, indicating genuine bearishness. If volume increases, the short-term downward pressure is greater.

Beware of False Signals

External volume > Internal volume but the stock price does not rise; instead, it falls, and volume fluctuates—be cautious of “fake bullishness.” Major players might be placing large sell orders at levels one to three to lure retail investors into buying, while secretly selling off. During sideways trading, if external volume is significantly larger than internal volume but sell orders keep piling up, a sudden plunge may follow.

Internal volume > External volume but the stock price does not fall; instead, it rises, with volume fluctuating—watch out for “fake bearishness.” Major players might be stacking buy orders at levels one to three to induce retail investors to sell, while quietly accumulating shares. This seemingly small upward move with internal volume larger than external volume could actually be a buildup phase, leading to further price increases.

In actual trading, it’s common to see situations where internal volume exceeds external volume, yet the price still rises. This is not contradictory because stock movements are influenced by multiple factors beyond volume and price, including market sentiment, news, and fundamentals.

Support and Resistance Zones: Advanced Use of Internal and External Volume

Internal/external volume ratio reflects current trading behavior, but the deeper technical analysis involves observing the interaction of support zones and resistance zones.

Meaning of Support Zones

Even if external volume > internal volume indicates active selling, if the price drops to a certain level and does not break below it, this suggests that a large number of buyers believe the price is cheap and are willing to buy in. This is a support zone. These buyers expect a rebound, and a rally may follow.

Meaning of Resistance Zones

If external volume > internal volume but the price cannot break higher at a certain level, it becomes a resistance zone. Usually, this is where previous buyers at higher levels are reluctant to sell at a loss or hold onto their positions. When the price approaches this level, they tend to sell to cut losses. The greater the selling pressure, the fewer people willing to push the price higher, turning this into a new resistance.

Practical Trading Tips

• When the stock is oscillating within a range: buy near support zones, sell near resistance zones.
• If the stock breaks below support or rises above resistance: it indicates that the existing buying or selling pressure can no longer control the situation, often leading to a one-sided trend—either a decline to the next support zone or a rally to the next resistance zone.

The Bright and Shadow Sides of Internal and External Volume Indicators

Advantages

• Real-time: updates simultaneously with trades, reflecting active buying and selling instantly.
• Simple concept: easy to understand, no complex calculations needed.
• Strong auxiliary tool: when combined with bid/ask order structures and volume, it can improve short-term trend judgment.

Limitations

• Prone to manipulation: major players can create false signals through “placing, executing, and withdrawing” orders to fake internal/external volume data. Relying solely on this can lead to traps.
• Short-term focus: only reflects current trading behavior, not suitable for long-term trend analysis.
• Potential distortion if used alone: must be combined with volume, technical analysis, and fundamentals for more reliable insights.

Final Reminder

Internal and external volume are tools to quantify buying and selling strength. When bid orders exceed ask orders, it quickly indicates the urgency of the bearish side. But investing is not about relying solely on indicators; they are just tools in your toolbox. To improve your success rate, you need to study company fundamentals, monitor macroeconomic cycles, and manage risk boundaries. Proper preparation is the real key to long-term profits.