What Is Time-weighted Average Price (TWAP)?

What is Time-weighted Average Price (TWAP)?

Time-weighted average price (TWAP) is an important trading indicator that has its roots in the concept of weighted average price, which provides insight into the average price of an asset over a certain time period, regardless of its fluctuations. This matrix summarizes the essence of market dynamics, capturing the development of an asset's price as it experiences increases and decreases within a predetermined period. 

By taking into account the price variations an asset experiences over a given duration, TWAP offers traders a comprehensive view of its performance over time, aiding in decision making and strategy formulation.

In traditional finance, stockbrokers often help traders and clients execute large orders algorithmically over specific time periods to obtain the best prices and reduce market impact. This occurs through the TWAP command, which provides the price of an asset over a certain time period.

Brokers must first identify the opening, closing, high and low prices of an asset on a given day and then find the average of those daily prices for each day when tracking the asset to calculate TWAP. By using the TWAP value, large orders into several small orders are assessed at the TWAP price because they are considered the most critical.

How to Calculate Time-weighted Average Price (TWAP)

After each order execution, there will be a duration-based delay before the next order is executed. For example, if the specified duration is 30 minutes and the total number of orders is 6, the interval between each order is (30/6) = 5 minutes. Typically, traders implement this strategy to prevent significant orders from having a direct impact on the market value of a particular asset.

In contrast to the volume-weighted average price (VWAP) indicator, the TWAP calculation only focuses on the specified time duration, without considering the volume of shares traded at each price point.

In the field of decentralized finance (DeFi), decentralized exchanges (DEX) that use time-weighted average market makers (TWAMM) seek to help traders execute large orders efficiently while minimizing gas costs and avoiding adverse price impacts. This approach simplifies the process and allows traders and users to determine relevant parameters without incurring intermediary fees, which is a departure from traditional financial practices.

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DISCLAIMER : This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.