Oh its so simple! Really!
What “felts” wool is two things: pressure and water. Agitation quickens the felting process, but it also makes the felt “harder” than the way I’m going to give you. So…here’s the quickest and easiest way to make your own felted saddle pad in the classic western shape:
Secure for yourself a whole (brown shopping) bag of wool that has been carded (cleaned and combed out) flat. It looks rather like the long layers of first aid cotton that comes off those rolls. Take a pillowcase (percale or flannel) and gently start to layer the carded wool inside. Place each layer in a different direction from the preceeding one: ie: the first layer of wool stretches from front to back, the second layer side to side, the next layer front to back, etc., until the pillowcase is plumped thick with wool. It will feel like the most luxurious down pillow you’ve every held!
Place the pillowcase on your horses back (no underpad) and put your saddle on top. As you girth up the pillow will compress, but not totally. Now … go ride. Your horse will love the feel of the fluffy wool, and your weight (and horsie’s sweat) will start the felting process to custom fit the wool to the horse’s back. As the wool becomes more compacted, add a layer or two of new combed wool, and continue using the developing pad until it is felted to the thickness and scope you like. You can then discard the pillowcase and just ride with the wool pad.
At that point you will find you can’t pull the wool apart – to trim it to your saddle you’ll have to cut it. However, I like the square shape because it holds my side packs away from my horse’s side. I use a light english cotton pad overtop of my felted pad to protect the flaps of my saddle from sweat, but find I have to change my pads at every hold because they are sopping wet where they touch the horse. The felt pad, however, stays wonderfully dry!
The second method is to put it in a pillow case, stitch the top closed and quilt the body of the pillowcase by hand to hold the wool in place. Now toss in the washing machine with hot water and Ivory Flakes. The heat and water and agitation will quickly felt the wool. Wring it out and let air dry – don’t throw it in the dryer unless you want it to felt all the way down into a mini-pad! 
PS. I have my own sheep, so I’m always felting something or other for my riding pleasure.
The endurance vets love seeing a homemade wool pad used for endurance riding and are VERY complimentary about how wonderful they are for the horse’s back.