TWAP vs. VWAP in crypto trading: What’s the difference?

Algorithmic trading strategies successful crypto

Algorithmic trading has go a go-to for galore traders arsenic it lets you automate trades based connected circumstantial rules — nary emotions, nary hesitation, conscionable axenic logic. These strategies tin scan markets 24/7, respond instantly to terms movements, and grip ample volumes mode faster than a quality ever could.

Some communal algo trading strategies include:

• Trend following: riding the wave of upward oregon downward momentum.
• Arbitrage: taking vantage of price differences crossed exchanges.
• Market making: placing bargain and merchantability orders to profit from the spread.
• Mean reversion: betting that prices volition return to their average implicit time.

Now, wrong the satellite of algorithmic trading, there’s a peculiar radical called execution algorithms. These aren’t astir predicting wherever the marketplace is going — they’re astir however to get successful oregon retired of a presumption without moving the marketplace excessively much. They’re particularly utile for handling ample orders discreetly.

A cardinal subset of these is passive bid execution strategies. These purpose to minimize slippage and get you arsenic adjacent arsenic imaginable to a just mean price. The 2 large names present are:

• Time-weighted mean terms (TWAP): splits your bid into adjacent parts implicit time, ignoring volume. It’s large for low-liquidity situations oregon erstwhile you privation to enactment nether the radar.
• Volume-weighted mean terms (VWAP): adjusts your commercialized size based connected marketplace volume, placing bigger trades erstwhile enactment is higher.

Both assistance you debar tipping disconnected the marketplace and are indispensable tools successful the crypto trader’s toolkit.

What is time-weighted mean terms (TWAP)?

TWAP, oregon time-weighted mean price, is 1 of the simplest and astir wide utilized execution strategies successful algorithmic crypto trading. 

At its core, TWAP helps traders interruption down a ample bid into smaller trades, executed evenly implicit a acceptable play of clip — careless of marketplace volume. The goal? To get an mean terms that reflects time, not marketplace activity, and to debar causing abrupt terms moves.

This strategy is particularly utile successful 2 scenarios: erstwhile you’re trying to softly execute a ample commercialized without alerting the marketplace and erstwhile you’re trading successful low-liquidity environments wherever adjacent mean orders tin determination prices. By pacing your trades, TWAP helps trim slippage and keeps your enactment nether the radar.

Its biggest spot is its simplicity — it’s casual to instrumentality and understand. But that simplicity besides comes with a tradeoff: TWAP doesn’t relationship for trading volume. So, during high-volatility periods oregon abrupt marketplace shifts, it mightiness miss cardinal signals and springiness you an execution terms that doesn’t bespeak the existent authorities of the market.

In short, TWAP is simply a large enactment erstwhile you request to commercialized steadily implicit time, particularly successful quieter markets. But if measurement and volatility are large concerns, it mightiness not ever springiness you the champion result.

Did you know? You tin easy adhd TWAP (time-weighted mean price) to your trading setup connected platforms similar TradingView by simply opening your chart, clicking “Indicators” and searching for “TWAP.” 

How to cipher TWAP

To cipher TWAP, you instrumentality the terms of the plus astatine regular clip intervals, adhd them each up, and disagreement by the fig of times you checked the price.

Here is the look to cipher TWAP:

In layman’s terms, the look looks similar this:

TWAP = (Price₁ Price₂ ... Priceₙ) / n

Let’s locomotion done an example.

Say you cheque the terms of Bitcoin (BTC) each 10 minutes and get the following:

90,000 → 90,100 → 89,900 → 90,050

Now adhd them together:

90,000 90,100 89,900 90,050 = 360,050

Then disagreement by the fig of intervals (4):

TWAP = 360,050 ÷ 4 = 90,012.5

What is volume-weighted mean terms (VWAP)

VWAP stands for volume-weighted mean price, and it’s a go-to metric for traders who privation a much realistic consciousness of an asset’s mean terms passim the day. 

Unlike TWAP, which conscionable averages prices implicit time, VWAP factors successful however overmuch measurement was traded astatine each price. That means prices with much trading enactment transportation much value successful the last mean — making it a amended reflection of wherever the marketplace really values the asset.

Traders often usage VWAP arsenic a benchmark. If you bargain beneath VWAP, you’re apt getting a better-than-average woody compared to the remainder of the market. It’s besides useful for spotting trends — if the existent terms is supra VWAP, the market’s astir apt bullish; if it’s below, that could beryllium a bearish signal.

VWAP has its advantages: It gives a much close representation of marketplace worth and tin assistance place erstwhile an plus mightiness beryllium overbought oregon oversold. But it’s not perfect. It’s much analyzable to cipher and tin get thrown disconnected by a fewer unusually ample trades, which mightiness skew the average.

All successful all, VWAP is simply a almighty instrumentality for traders who privation deeper penetration into marketplace dynamics, but similar immoderate indicator, it works champion erstwhile utilized alongside different signals.

Did you know? ​The word volume-weighted mean terms (VWAP) was archetypal introduced to the trading assemblage successful a March 1988 Journal of Finance nonfiction titled “The Total Cost of Transactions connected the NYSE” by Stephen Berkowitz, Dennis Logue, and Eugene Noser Jr. In this paper, the authors presented VWAP arsenic a benchmark for assessing the prime of commercialized executions by organization investors.

How to cipher VWAP

VWAP works a spot differently. Instead of treating each terms equally, it gives much value to prices wherever much trading measurement occurs. 

Here is the look to cipher VWAP:

In plain terms, the look is:

VWAP = (Price × Volume astatine each point, each added up) ÷ Total Volume

Let’s spell done an example.

Say you person this information for BTC:

• 90,000 astatine 10 trades
• 90,100 astatine 20 trades
• 89,900 astatine 5 trades
• 90,050 astatine 15 trades

First, multiply each terms by its volume:

• 90,000 × 10 = 900,000
• 90,100 × 20 = 1,802,000
• 89,900 × 5 = 449,500
• 90,050 × 15 = 1,350,750

Now adhd those results:

900,000 1,802,000 449,500 1,350,750 = 4,502,250

Then cipher the full volume:

10 20 5 15 = 50

Finally, disagreement the full worth by the full volume:

VWAP = 4,502,250 ÷ 50 = 90,045

When to usage TWAP vs. VWAP?

It truly comes down to what benignant of commercialized you’re making and what the marketplace looks similar astatine the time.

If you’re trading during engaged hours and privation to marque definite you’re not overpaying — oregon underselling — compared to wherever astir of the enactment is happening, VWAP is your friend. It gives you a consciousness of the market’s “true” mean terms by factoring successful volume, truthful it’s large for benchmarking your trades oregon timing your introduction and exit successful enactment with marketplace momentum. If you’re buying beneath VWAP, you’re apt getting a coagulated deal.

TWAP, connected the different hand, is amended erstwhile you’re trying to enactment nether the radar. Maybe you’re dealing with a little liquid coin, oregon you’re trading astatine a quieter clip of time erstwhile measurement is each implicit the place. In that case, TWAP helps you dilatory enactment your mode into oregon retired of a presumption without spooking the market. It doesn’t attraction astir measurement — it conscionable paces your commercialized retired implicit clip successful adjacent chunks.

So, large picture: Use VWAP erstwhile you’re pursuing the assemblage and privation to clip things smartly. Use TWAP erstwhile you’d alternatively determination softly and support things simple.

TWAP vs. VWAP: Key differences to beryllium alert of

TWAP and VWAP successful crypto trading

Traders and institutions usage TWAP and VWAP to minimize marketplace interaction and unafraid amended execution prices. 

Let’s look astatine 2 real-world examples that amusement however these algorithms execute erstwhile the stakes are high.

1. Strategy’s $250-million Bitcoin bargain with TWAP

Back successful August 2020, Strategy (called MicroStrategy astatine the time) made headlines by announcing a $250-million concern successful Bitcoin (BTC) arsenic a treasury reserve asset. Rather than entering the marketplace each astatine erstwhile — and risking a crisp terms leap — they partnered with Coinbase and utilized a TWAP strategy. 

By spreading the acquisition retired implicit respective days, Strategy was capable to blend into marketplace activity, minimizing slippage and securing a favorable mean price.

2. Definitive’s TWAP strategy for Instadapp (INST)

A large crypto VC steadfast utilized TWAP to grip a ample presumption successful Instadapp (INST), a decentralized concern token known for its debased liquidity. Over 2 weeks successful July 2024, it executed the commercialized successful tiny chunks utilizing Definitive’s TWAP algorithm. 

The effect was a 7.5% betterment implicit what it would’ve paid utilizing VWAP, and state fees made up conscionable 0.30% of the $666,000 order. It was a wide triumph successful presumption of some cost-efficiency and stealth execution.

3. Kraken Pro and the usage of VWAP

Kraken offers precocious trading capabilities done its Kraken Pro platform, which includes VWAP arsenic a built-in method indicator for traders. On Kraken Pro, users tin entree VWAP straight successful the charting interface, powered by TradingView integration, to analyse crypto assets crossed assorted timeframes.

For instance, a trader connected Kraken Pro mightiness usage VWAP to optimize a Bitcoin trade. They could acceptable up an bid to bargain BTC erstwhile the terms dips beneath the regular VWAP — indicating it’s trading beneath the volume-weighted mean and perchance undervalued — and merchantability erstwhile it rises above, suggesting overvaluation oregon profit-taking opportunities. 

Institutional clients and high-volume traders, successful particular, trust connected Kraken’s VWAP functionality for precision successful the fast-moving crypto market.

Whether you’re managing a large bid oregon conscionable trying to get a just entry, knowing erstwhile and however to usage some TWAP and VWAP tin springiness you a superior borderline successful the market.

Happy crypto trading!