So this question is about how are market prices created when it comes to daily gap ups/gap downs. Been trading for about 6 months, my style would be more swing trading/price action studies. Watched a documentary the other day called "Ghost Excange" which kind of goes on a bit about todays market structure. Its kind of unbiased, the people interviewed go over the pros and cons of HFT(which I know now covers a wide range of trading strategies, not just running ahead of orders), dark pools, and what happened the flash crash a little bit. So my understanding of the market is that buyers and sellers meet to exchange at agreed prices. I want to buy at 10$, the other trader wants to sell at 10$ so we're matched up and the trade is made. Now when I look at a lets say a 1m chart. I can see a wide range of prices being met between traders. I should say this is true for liquid stocks which is what my question is about. So, in the market, you'll have stop orders, limit orders, buy to cover orders, etc. And these in my mind could be really anywheres in a stocks range. I mean I think we've all had the market chase a stop order and then bounce back. The market knows where they are since its usually at support lines. So I can see how the market is moving and during the day it makes sense. Now going to daily charts. Gaps confused the heck out of me. Say a stock closes at 10$, next day theirs huge news or something and it opens at 15$. If you were short this stock, and had a stop on, you would've been triggered at selling it at market value at that opening of 15 minimum. What confuses me here is that I find it weird that their was not one set of limit/stop orders that met somewheres between this gap. I mean in essence couldn't a trader have a buy stop order at 11 and the trader who was short have a stop order at 11 and both would've been happy traders. I understand a little bit about what a market maker is and how they work to give that liquidity to the market. If someone could point me to any material to kind of grasp the knowledge of how the system kind of works. I guess this would be part of auction market theory. Or here is another recent example. Aug 24th, we all seen the huge gap down and that big rally up for the end of the day. How did the markets open so low. Most stocks made huge rallies for the day so traders must have seen value, why was their no value seen on the way down? I didn't have any trades on that day luckily but this is something that interest me. With the amount of algorithmic systems out there trading from institutions and retail that prices could range this much. This seems like the opposite of HFT to me lol.
It's all about demand and supply. More demand, or more buyers willing to pay higher price, the higher the price will rise; less demand, the lower. Same for supply. More supply, or more sellers, the lower the price will fall. So if you placed an overnight buy order at $11 but there are flurry of buyers who are bidding higher than you (eg, $12...$12.50...$13...$14...etc.), it will go to the highest bidder.
So reading what I wrote, I noticed my brain wasn't working right for a bit. "What confuses me here is that I find it weird that their was not one set of limit/stop orders that met somewheres between this gap. I mean in essence couldn't a trader have a buy stop order at 11 and the trader who was short have a stop order at 11 and both would've been happy traders." That made no sense on my part as a short with a stop loss or buy to cover(not sure of the proper term)doesn't actually own any stock so he has to buy to cover putting him in the buyer seat as well. Ignore my stupidity there.
You also must consider which market you are trading and what hours it trades. For example, a stock such as AAPL might have an earnings report after the market closes but it is still trading in "afterhours" trading. So the prices may be more continuous if you look at the complete record of trades (which includes off hours trading). Same with SPY for example - the futures market trades nearly all day long which is not reflected in a daily SPY chart. Thus the gaps.
%%%%%%%%%%%%%%%%%% Good points; + you may see more gap ups in uptrends, gap downs in bear-downtrending markets, especially ETFs. Not a prediction; wisdom is profitable to direct.