What Is the Time-weighted Average Price (TWAP)?

The time-weighted average price (TWAP) is a trading indicator based on weighted average price, which shows the average price of an asset as it rises and falls during a given or specific time period.

In traditional finance, stock brokers often help traders and clients to execute large orders algorithmically over a set period of time to get the best price and reduce market impact. This happens through a TWAP order, which gives an asset’s price over a set period of time. 

The brokers must first identify the opening, closing, high and low prices for the asset on a given day and then find the average of those daily prices for each day when tracking the asset to calculate the TWAP. Using the TWAP value, a large order into a few small orders is valued at the TWAP price because it is deemed the most critical.

Once each order is executed, there will be a delay for (duration/order count) minutes. For example, if the duration is 30 minutes, and the order count is 6, then there will be a (30 / 6) = 5-minute delay between each order. Generally, traders do this to avoid letting a huge order suddenly increase the value of a given asset in the market.

TWAP can be calculated for any specified time duration and does not take into consideration the number of shares traded at each price point measured, unlike the volume-weighted average price (VWAP) indicator.  

However, in Decentralized Finance (DeFI), a Decentralized Exchange (DEX) using a time-weighted average market maker (TWAMM) aims to help traders execute large orders as efficiently and as quickly as possible, at low gas prices and without negatively affecting price. 

This makes things much simpler while allowing traders and users to set relevant parameters without having to pay intermediary fees, unlike in traditional finance.

Author Bio: Hisham Khan, CEO of Aldrin

Hisham Khan comes from a decade-long background in managing and building robust and innovative financial and enterprise technology. With an extensive career at Bloomberg and based in New York, Hisham has worked as a project manager with some of the world’s top engineers. It was here where he discovered the transformative impact of cryptocurrencies and has since left Bloomberg to build comprehensive and accessible trading tools through Aldrin. His core mission is to make advanced crypto trading and strategy development available for everyone