What are tWAPs and vWAPs, and how are they different?
article by CryptoJelleNL
Time-weighted average price and volume-weighted average price, the two names suggest that they are similar items in a trader's toolbox; in the same category as (exponential) moving averages. In today's article, we dive into both vWAPS and tWAPS, to discover what they are, and if they really are that much alike.
What is a vWAP?
The volume-weighted average price indicator is a powerful tool to use in your analysis. Similar to moving averages, it is meant to display the overall direction of a market, calculating an average price. Where moving averages calculate the average per candle, vWAPS incorporate volume into that calculation - assigning more weight to prices where high volume occurred.
The vWAP is calculated as follows:
- For each candlestick, take the high, low & closing value of the candle, and divide it by three. Let's call this the true price.
- Multiply the true price by the volume during each respective candlestick. Let's call this outcome Bob.
- Divide the sum of all Bob's by the total volume.
With many traders considering volume to be one of the most important metrics in trading, it makes sense that vWAPS are a popular tool in the trading toolbox. Traders use it as a trend-following tool, or even to determine overbought and oversold conditions. The vWAP is typically used on intraday charts; seeing as the indicator becomes more prone to lag, as more data is added to it. This is strongly visible at the end of a trading day when viewing the 1-minute chart – where the vWAP will act extremely similar to a regular, slower-moving average. Nevertheless, it can be used in any timeframe. On a monthly chart, the sum of the output will reset on any first trading day of the week.
As with any indicator, traders should not blindly trade based on the vWAP alone. Indicators are best used in confluence with other forms of analysis. For example, while some traders might consider an asset to be undervalued when trading below the vWAP, a strong downtrend can keep prices below the vWAP for quite some time.
What is a tWAP?
The time-weighted average price indicator is similar to the vWAP - intended to display the overall direction of a market by calculating the average price. The tWAP indicator calculates the average price for each candle, and then uses all of those averages to calculate another average, resulting in the tWAP. This indicator is not much dissimilar to a traditional moving average.
When traders speak of a tWAP though, they are usually referring to a tWAP order. This advanced order type is often used to fill larger positions with minimal market impact. The tWAP order type is an algorithmic trade execution tool that allows traders to fill positions with an average execution price close to the time-weighted average price in a pre-set period of time.
For example, trader Josh might set up a tWAP order to buy 0.25 bitcoin every hour, for 40 hours - instead of just market buying 10 bitcoin in one go.
This method of scaling into large orders is often used by the big fish, such as Tesla and Microstrategy - and has become more widely available to the public in recent years. Binance, for example, allows you to use tWAP orders with as little as $10,000.
Closing thoughts
All in all, while the names sound very similar, the tWAP and vWAP are two very different tools in the trading toolbox.
The volume-weighted average price is a powerful indicator that's used to display the overall direction of a market, taking into account the transaction volume to compute the average.
When we speak of a tWAP - most people refer to the time-weighted average price order - a tool used by high-volume accounts to scale into larger positions without affecting the market price too much.
Author's Disclaimer: This article is based on my limited knowledge and experience. It has been written for informational purposes only. It should not be construed as investment advice in any shape or form.
Editor's note: CryptoJelleNL provides insights into the cryptocurrency industry. He has been actively participating in financial markets for over 5 years, primarily focusing on long-term investments in both the stock market and crypto. While he watches the returns of those investments roll in, he writes articles for multiple platforms. From now on, he will be contributing his insights for Alpha Circle as well.
Check out his twitter: twitter.com/cryptojellenl
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