Time weighted average price (TWAP) is a trading tool that is used by algos to distribute orders throughout a trading day without worrying about the effects of the trades on the prices or without worrying about being discovered by other traders. TWAP is actually similar to the VWAP tool except that it lacks the volume module. Since it doesn’t bother about the volume, TWAP is very easy to obtain. All you need is to get the price of each period bar which you can do by the help of the following equation:
Typical price = (Closing price + High price+ Low price + Open price)/4.
Application of the TWAP strategy
The most obvious use for the TWAP strategy is to evenly distribution of big orders throughout the day. For instance, if you want to purchase several Bitcoin on an exchange, putting one huge order will impact the market price significantly and the prices will rise. By using the TWAP strategy, you can avoid this by spreading out your buys over a predetermined period. TWAP can also be used in the place of VWAP but the trader must be careful because its simplicity might also attract some undesired pitfalls. While slicing the large orders into smaller chunks helps to avoid impacting the market negatively, there is the possibility of getting stuck in a low liquidity period and the split order will still have far-reaching consequences on the market. It is therefore advisable to use the TWAP strategy over short periods.
Another challenge of the TWAP strategy is its predictability. If you are not careful other algorithms and traders might notice your trading pattern and use it against you. The best way to achieve this is to introduce some randomness into the strategy. This will help to hide the TWAP strategy from any predatory algorithms on the market. One simple way to achieve this is to use a linear approach to attain the target. For instance, you can program the algo to achieve a certain percentage of the order within the first 3 hours, another percentage in the next 2 hours, and so on and so forth. For instance, you can say you want to the first 35% completed in the first 2 hours, the net 35% completed in the next 4 hours and the last 30 completed in the next 5 hours. This gives the algo some freedom in the order sizing and helps to conceal the operations.
TWAP is commonly used in the stock market but the volatility of cryptocurrency makes it a perfect tool for the crypto market as well. Executium is the best tool for executing TWAP orders. That’s because Executium provides a proven and tested TWAP strategy execution across some of the most popular exchanges like Kraken, Binance, Bitstamp, Bittrex, Bitmex, and Bitfinex. With Executium, you simply set your TWAP order on your preferred exchange and just wait for the system to do the work for you. No need to worry about order slippages r any other issues that might cost you money.