How stock and futures prices actually form: market makers post passive buy and sell orders in the order book, traders hit those orders with market orders, and a first-in-first-out algorithm matches them. When a market order is bigger than available liquidity, it causes slippage and creates the wicks you see on candles.
This is how stock prices move. For every higher price, there's people who are offering to sell maybe one stock or future and basically say, "Who wants this one stock? Who wants this one? Who wants these two stocks?" For lower prices, there's people offering to buy shares or futures and say, "Hey, who wants to sell this one to me? Who wants to sell this other one to me?" And all these buys and sell offers are summarized in the so-called order book. The best bid and the best offer create a little space between them called spread. But this is just the top of the book, Level 1 data. The same thing, though, happens in every step of the price With Level 2 data, or market by price, you can see the full market depth. With Level 3 data, or market by order, you can also see every single order. But again, these are only passive buyers and passive sellers, also known as market makers. They're just offering to buy or sell. Someone needs to take action. So an aggressive buyer might come in and act as a market taker, which basically says, "Hey, I will buy 2 of those," by clicking the Buy Market button, which will send his 2 buy contracts to the matching algorithm that through a first-in, first-out system will match it with the first sell order that was offered. The price they were matched becomes the new price, and the candle opens. If someone else buys 5 contracts market, the matching algorithm will try to fill them at the most convenient counterpart. So 2 will be matched here, but 3 will be matched slightly upper. This phenomenon is called slippage. Now, the last price there was a match is the new price, and the candle ticks above. If someone sells 8 contracts market but there's no counterpart, he will also be slipped at the best price where there's at least a buy offer. 3 contracts will be matched here, and 5 will be matched here. As soon as they're matched, the new price will be 98 and the candle will move here, turn red, and leave a wick above where it used to be. All the contracts that were traded will be shown in the volume profile or in the footprint chart. Soon enough, the book will repopulate with new orders and the auction can continue. You can follow for the next episode and
