As this article points out, trend following or using technical indicators in a vacuum can be doomed without analysis of the order book. When we want to buy into market movement, we want to make sure that the order book supports the direction indicated by technical signals and is not about to start a reversal.
Processing the order book from snapshot to shapshot, we can determine:
- ratio of bid to ask interest
- bid interest up/down
- ask interest up/down
- bid aggressed (using last traded price and reduction of bid size to determine)
- ask aggressed (using last traded price and reduction of ask size to determine)
Going further one can look at the complexion of orders at each level, determining what sort of players are behind the orders. Knowing this can add further bias to the weighting of direction.