Time Weighted Average Price (TWAP) is the average price of a future within a given period of time. It is a variant of VWAP (Volume Weighted Average Price). TWAP is used mainly by large institutional investors for the purpose of executing large transactions and to avoid a disturbance of the market volatility. This is achieved by distributing the orders almost evenly over a period of time. The most popular strategy is to distribute TWAP orders all through the day. The main difference between TWAP and VWAP is that volume is not a parameter involved in the calculations.
TWAP in online trading
TWAP in online trading is essentially algorithm trading which is guided by complex and advanced mathematical formulas and models to make quick and best-possible decisions from the financial markets. Because algorithms are developed in advance, they are automatically executed and thus, they derive two essential benefits to the market.
TWAP is designed to scatter the execution of an order within a given period of time. For example, 25% within 2 hours, 45% within the next 2 hours, 25% in 2 hours, and the last 5% in the last 2 hours. The algorithm will be accurate in the implementation of this plan. In such a case, it eliminates the possibility of errors which are almost guaranteed when humans are trading. In addition, TWAP allows for back-testing to ascertain the feasibility of the formulas and models being used. If any discrepancies are established, then they can be removed to make the system even more accurate.
ii. Reduction of time and cost
Trading through human resources is expensive and tedious. TWAP, therefore, is important in that it is self-monitoring and traders do not have to make frequent follow up checks on the stocks. The system saves money and time that can be invested in other trading avenues to increase profits. TWAP is available and ready to function for 24 hours, seven days a week, contrary to humans who must take a break.
Consideration to make in using TWAP
To make the most out of TWAP, it is advised that the order is staggered unevenly, as in the example used earlier above. Dividing the order evenly can lead to other predatory algorithms or other traders reading through the strategy and “gaming” you. In addition, use varying percentages and even the time accorded from a day to day basis. For example, if you use a 25% for 2 hrs, 45% for 2 hrs, 25% for 2 hrs, and 5% for 2 hrs, and 5 . Tomorrow, you can use a 15% for 1hr, 30% for 1hr, 25% for 1hr, 20% for 1 hr, and 10% for the last hr.
When using TWAP for online trading, it is important to choose the stock wisely. Experts recommend that the stocks chosen should be easy to locate . It's hard to find stocks that are too complicated and waste vital time. The best stocks are those that you, as a trader, will make a determination by only looking. Additionally, the choice stocks are those with an average price from the time of starting trade to when the markets close.
Finally, because TWAP can generate quite a substantial amount of income within a very short period of time, it is important that you make your call very fast. Additionally, have insight on the market, be accurate, and be aware of predatory investors and possible cyber-attacks.