Volume-Weighted Average Price is a commonly used indicator by intra-day traders. From the first look, it might seem that it’s similar to Moving Averages, but taking a closer look, we can see that they are quite different. 

When using Moving Average, it simply calculates the average price for certain timeframes, while VWAP takes into account traded volume in a given timeframe and compares it to the total volume traded during that day. Let’s take a look at how VWAP is calculated.

First, we need to calculate the regular price. For this, we need to look at the candlestick and take high, low, and closing prices. Then we divide the number by three and we have our regular price. Different people refer to this price in different ways, so don’t be surprised if someone calls it something different. 

Then we need to take this regular price and multiply it by the total volume for a given candlestick. We need to do this, for every candlestick we want to gather data from. 

Once we have this number, we need to bring it down to resemble something reasonable. This is where the total trading volume for the day comes into play. We take the number calculated and divide it by the total trading volume for that day. So the formula for this is following:

(Regular Price * Trading Volume) / Total Trading Volume = VWAP

How to use VWAP?

We know what VWAP is and how to calculate it, but how do we actually use it? Well, there is no definitive answer to this question, as each trader might use VWAP in different ways. Some traders use VWAP as a trend-following indicator and see if the market is bullish or bearish. 

Some traders use VWAP to spot overbought and oversold assets. They only buy assets that are lower than VWAP and sell once their price goes over VWAP. But there are also traders who view this completely differently and buy when the price goes over VWAP and sell once it falls below it. It all comes down to personal preference and the strategy we are using.

It’s also important to mention that VWAP is considered a lagging indicator. As the day goes on, more and more data is being added to the indicator, which causes it to lag behind. But despite this, people still use this indicator for almost every timeframe, and depending on the way we use it, it gives us pretty good information. 

Another weighted indicator that is commonly used by traders is the Time-Weighted Average Price indicator which is similar to the Volume-Weighted Average Price. It takes into account the regular price for each candle and does not rely on traded volume.

In order to calculate the TWAP, you need to once again calculate the regular price. Which is the high, low, and closing price of a candle divided by three. After this we simply divide this, add the regular price of multiple candles and divide it by the number of candles used. The formula is following:

Regular Price / Number of candles = TWAP

How to use TWAP?

When people mention TWAP, they usually refer to the TWAP trading strategy rather than the indicator itself. This strategy is of course based on the TWAP indicator and is used to fill large positions that have low liquidity and in the process avoid slippage or fall victim to market volatility. This order type divides large orders into smaller ones and fills them in regular intervals. With this, traders can execute large orders and the average price of the order will be TWAP. 

These orders are commonly used to avoid market volatility by large players. When someone is entering an open market with the goal of buying a large number of tokens, it will most likely cause volatility. But with TWAP, these buying orders will be divided into certain timeframes, which will have less impact on the market. 

It is also a great tool to use if you want to hide yourself. When you are conducting large orders on the market, you are going to leave a pretty noticeable footprint. This might attract unwanted attention from other traders, but with TWAP, you can easily hide your activity with multiple smaller orders. 

But since the market is competitive and a lot of people already know about TWAP, it’s not that hard to spot someone using this strategy. When placing similar orders throughout a certain timeframe, if someone is keeping an eye on you, they will easily spot this. This is also not a very useful tool for small-time traders, who don’t execute very large orders and don’t need to hide their presence on the market. 

Now that we know what each of these two is used for, it should not be hard to spot the difference between them. Taking a glance at these two indicators, we can see that both of them take the regular price of crypto for a certain time frame and use it to get a certain insight. But if we take a closer look at these, there are more differences than similarities. 

Volume-Weighted Average Price is used to follow the market and understand where it’s heading. It’s a great tool for intra-day traders, who want to receive a deeper look into the average price of a coin. It’s also an indicator that can be adapted to many strategies and depending on the strategy used, this indicator will provide different insights into the market. 

While on the other hand, Time-Weighted Average Price is used for executing orders. This is used by big investment firms or very large traders. Since TWAP can be used to divide large orders into smaller pieces, it’s a great tool to protect yourself from market volatility and prying eyes, but it gives less insight into what is going on in the market.

Volume-Weighted Average Price and Time-Weighted Average Price are two great tools that most traders should use. If you are a regular trader, VWAP will be more beneficial for you, since it can give you information about market trends and directions. While TWAP will be best for filling large orders.

But remember that these are just two indicators that give limited information. It does not matter which indicator we use, VWAP, TWAP, or anything else, it’s best to use them in combination with other indicators and tools. Crypto or any other financial market is filled with many different moving parts that affect the market price and overall direction. No single indicator can provide us with a deep insight into the market and every successful trader will tell you to use multiple indicators and to choose the indicators that are a good fit for your strategy and not something that someone just recommended.