What Is the Time-weighted Average Price (TWAP)?
The time-weighted average price (TWAP) is a trading indicator used to calculate the average price of an asset over a specific time period, taking into account the fluctuations in its price during that period.
In traditional finance, brokers often use TWAP orders to help traders execute large orders algorithmically over a set timeframe.
The goal is to obtain the best possible price while minimizing market impact.
A TWAP order divides a large order into smaller orders and executes them gradually throughout the specified period.
Calculating TWAP
To calculate TWAP, brokers gather the opening, closing, high, and low prices of the asset for each day within the designated time period.
They then determine the average of these daily prices, which represents the TWAP value.
By executing smaller orders at the TWAP price, the impact on the market is reduced.
When implementing a TWAP order, there is often a delay between each order execution to spread out the impact on the market.
The duration of this delay is determined by dividing the total duration of the order by the number of orders.
TWAP can be calculated for any specified time duration and is not influenced by the volume of shares traded at each price point, unlike the volume-weighted average price (VWAP) indicator.
Empowering Traders
In the context of Decentralized Finance (DeFi), some Decentralized Exchanges (DEXs) use a time-weighted average market maker (TWAMM) to facilitate efficient and low-impact execution of large orders.
This approach allows traders and users to set relevant parameters without intermediaries and associated fees, making it more accessible and cost-effective.
TWAP is a widely used trading indicator that helps manage large orders and minimize market impact by executing trades based on the average price over a specified time.