I want to call attention to Damien Hoffman's excellent interview with Mike Bellafiore of SMB Capital. Damien has assembled a number of high quality interviews at the Wall St. Cheat Sheet site that are worth reading. Mike offers his perspectives from the front lines of a New York City proprietary trading group. One thing I like is that he emphasizes the role of reading order flow in short-term trading.
My experience is that an understanding of (and ability to read) order flow is one important factor that separates the older, successful generation of daytraders from the newbies who only know simple chart patterns and indicator readings. Reading order flow consists of two facets: 1) seeing and understanding where large orders (bids and offers) reside in the book; and 2) seeing and understanding where large orders are actually transacted.
If large offers consistently appear at a particular price, but we end up transacting relatively little volume when we hit that price, what does that tell you about the sentiment of sellers?
If large bids appear at a cluster of adjacent prices and we transact relatively large volume eating through those bids, what does that tell you about buying sentiment?
What does it tell you when large offers or bids consistently appear above or below VWAP? At the edges of trading ranges?
If you don't see the order book, all of that information is lost to you.
Mike trades and trains traders; here's his take on order flow:
"The thing I see with new and developing traders is their lack of ability to read the tape. When we make trading decisions, we read the tape, look at our charts, and have an understanding of fundamental analysis intraday. But I see too many people who just rely on the charts or their own brand of fundamental intraday analysis. They don’t understand how to read the order flow. And order flow gives us a huge advantage. We can truly see the most important levels of a particular stock. So when I tweet a particular level and you see the trade works out, it’s not a coincidence. If you see that level isn’t on your charts, that’s also not a coincidence. Again, we’re seeing the most important levels intraday because we’re watching where the orders are being exchanged. Having this skill enables you to take much bigger positions at very important levels and decrease the risk you would have in a position. It makes your win rate a lot more consistent. Finally, tape reading gives you an edge over a lot of the market players who you’re competing against. We see too many people who don’t know how to read the order flow, and we’d like to see more traders learn that skill."
Very, very few authors who write trading books and articles will cover this topic. Very many traders don't know what they don't know. The shorter the holding period of your trades, the more important it is to see where bids and offers reside, where they are pulled, and where they transact.