Trading in large, extensive amounts can be risky. Most algorithm traders break up the volume that they push into the market, effectively lessening the risk and danger of their trade.

Time-weighted average price (TWAP) and volume weighted average price (VWAP) are common trading strategies and profit calculations that are used in crypto exchange, algorithm trade, and stocks. Each strategy has a specific formula that it follows, and through these formulas, certain trade benefits can be achieved. However, which strategy is better?

To begin, I’ll describe the individual specifics of TWAP and VWAP, then list some of their pros and cons. To summarize, I will suggest which type is best for each trader.

What is TWAP?

As the name suggest, TWAP deals in time calculations. It will calculate the average price of a financial asset (security) over a specified and short period of time. The strategy follows a more traditional path, where traders typically—but not always—rely on a 50/50 volume during the day.

What is VWAP?

VWAP is a more complex and advanced calculation. It presents the average price with a higher accuracy and will deliver an ongoing total during the trading day. Typically, a trader using a VWAP strategy will enter the market at 40% during the initial half of the day, then follow with 60% during the remaining part of the trading day.

TWAP Pros

✓ Simple calculation
✓ Calculations are easy to obtain
✓ Great for the distribution of large orders throughout a trade day
✓ Can maintain the market price and minimize impact

TWAP Cons

✗ Predictable style can make you vulnerable to other traders and algorithms
✗ Not as useful
✗ Viewed as more primitive
✗ Lack of randomization can lead to vulnerability within the market

twap vs vwap

VWAP Pros

✓ Estimates success of trade deal
✓ Can determine the course of movement within the market
✓ Can determine condition of trade and whether the trader received a profitable price
✓ Useful in small trades
✓ Good strategy for the first half of the trading day
✓ Can minimize impact costs

VWAP Cons

✗ More complex calculation
✗ It can lag
✗ Fails to determine opportunity cost
✗ Can manipulate the trade only during times when the market prices are at favorable levels
✗ Only analyses days in isolation
✗ Lack of randomization can lead to vulnerability within the market

vwap vs twap

Which One is Better?

Similar to most trade strategies, the "which one is better?" question is not always possible to definitively answer. Throughout a trading day, circumstances vary significantly. Share amounts, trade outcomes, varying market conditions are only a few circumstances that can alter or impact any given trade day.

In most instances, VWAP is a better strategy to implement when traders want to accurately determine their profit capital in smaller trades. By trading in relation to the market’s volume, traders can also minimize transaction costs.

Alternatively, for larger trade orders, a trader may consider using a TWAP strategy. Because there’s more freedom with this strategy, traders can enter the market at varying sizes.

The best way to approach this question is to decide which strategy will work best for your current circumstance.