What is Time-Weighted Average Price (TWAP)?
Let's find out Time-Weighted Average Price (TWAP) meaning, definition in crypto, what is Time-Weighted Average Price (TWAP), and all other detailed facts.
Time-weighted Average Price (TWAP) is a type of trading indicator that answers the question of what is the average price of a security throughout a set period of time.
Trading indicators give information that allows investors to make better trading decisions.
When it comes to traditional finance, TWAP’s main function remains the same. However, it’s mostly used to help traders to execute large orders in a specific order and time period. The goal here is to find the best deal while also minimizing the impact on the market.
How to Calculate the Time-Weighted Average Price (TWAP)?
Traders start by analyzing the market and searching for the opening and closing prices. As well as each day’s lowest and highest prices which then help them to determine the average of the daily prices.
When the traders have this data, they’re able to calculate the TWAP value by taking the average of the individual daily averages. This value can be used to split a large order into smaller orders that are valued at TWAP price. This is due to the fact that it’s considered to be the value that holds the highest importance.
Each executed order has a delay. This delay can be counted by taking the duration and dividing it by the order count. For instance, let’s say the duration is 10 minutes and the order count is 2. We can calculate the delay like this:
10/2=5
This means there will be a 5-minute delay between every order placed.
Traders calculate the delay to prevent a large order from increasing the value of a specific asset in the market.
When it comes to the crypto sector, decentralized exchange (DEX) uses a time-weighted average market maker (TWAMM) instead. TWAMMs enable traders to efficiently execute large orders while minimizing the price impact and maintaining low gas prices.