Avatar or Logo
Avatar or Logo
Avatar or Logo

TWAP vs VWAP

Mar 15, 2023

None of the information contained here constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy.

When it comes to trading, there are many different methods used to determine the average price of a security over a given time period. Two commonly used methods are the Time-Weighted Average Price (TWAP) and the Volume-Weighted Average Price (VWAP). While both are used to calculate the average price of an asset, they differ in their approach and how they are used by traders.

TWAP

The Time-Weighted Average Price (TWAP) is a method used to calculate the average price of an asset over a given time period, without taking into account the volume of trades executed during that period. The calculation is based on the time period in question, and is weighted so that each time interval is given an equal weight.

For example, if we wanted to calculate the TWAP of Bitcoin over a period of 5 hours, we would divide the total value of trades executed during that period by 5, to get the average price for each hour. This approach ensures that each hour is given equal importance, regardless of the volume of trades executed during that hour.

TWAP is commonly used by institutional investors or whales, who often have large orders to execute over a given time period. By using TWAP, these investors can execute their orders without causing significant price movements in the market. This is because TWAP takes into account the price movements over the entire time period, rather than just at the time of execution.

Integral SIZE offers a 30-minute TWAP, available on Ethereum and Arbitrum. SIZE's unique design lets traders execute swaps with no price impact from the 30-minute oracle price. 

VWAP

The Volume-Weighted Average Price (VWAP) is a method used to calculate the average price of an asset over a given time period, taking into account the volume of trades executed during that period. The calculation is based on the volume of trades executed at each price level, and is weighted so that prices with higher volumes are given more importance.

For example, if we wanted to calculate the VWAP of Ethereum over a period of 5 hours, we would take the total value of trades executed during that period, and divide it by the total volume of trades executed during that period. This approach ensures that prices with higher volumes are given more importance, as they are likely to have a greater impact on the average price of the security.

VWAP is commonly used by traders who are looking to execute large orders in a single day. By using VWAP, these traders can ensure that they are getting the best possible price for their order, as it takes into account the volume of trades executed at each price level. This approach can help traders avoid executing their orders at unfavorable prices, as it provides a more accurate picture of the market.

What are the Differences Between TWAP and VWAP?

The main difference between TWAP and VWAP is how they take into account the volume of trades executed during a given time period. While TWAP gives equal importance to each time interval, regardless of the volume of trades executed, VWAP gives more importance to prices with higher volumes.

Another key difference between TWAP and VWAP is their application in different trading scenarios. TWAP is commonly used by institutional investors who are looking to execute large orders over a longer time period, while VWAP is commonly used by traders who are looking to execute large orders in a single day.

TWAP and VWAP can also produce different results in volatile markets. In markets with high volatility, TWAP can produce skewed results, as it takes into account the entire time period, rather than just the time of execution. VWAP, on the other hand, can provide a more accurate picture of the market, as it takes into account the volume of trades executed at each price level.

Conclusion

In conclusion, TWAP and VWAP are both methods used to calculate the average price of a security over a given time period. However, they differ in their approach and how they are used by traders.