Simply choosing the right stock isn’t enough; how you buy and sell it matters just as much. Placing a large order all at once can often move the market price, leading to poor execution. To avoid this, traders rely on specialized execution strategies. Two of the most widely used are VWAP (Volume-Weighted Average Price) and TWAP (Time-Weighted Average Price). While VWAP executes trades in line with market volume, TWAP spreads orders evenly across fixed time intervals.
In this blog, we’ll break down what VWAP and TWAP are, their formulas, examples, their key differences, their role in different markets, common mistakes to avoid, and finally, how to choose the right approach for your trades.
What is VWAP?
VWAP, or Volume-Weighted Average Price, is an indicator that shows the average price of a stock during a trading day. However, this isn’t a simple average; each price is weighted by the volume at that time. This means that prices that are more heavily traded will have a greater impact on VWAP.
VWAP Formula
VWAP = ( Σ (Price × Volume) ) ÷ ( Σ Volume )
Where,
- Price = the price of each trade
- Volume = the number of shares bought/sold in that trade
- Σ (Price × Volume) = the total of all trades (price × volume)
- Σ Volume = the total volume of all trades
Example : If three trades were made in a stock:
- 100 shares at ₹200
- 150 shares at ₹205
- 250 shares at ₹210
Then,
Price × Volume = (200 × 100) + (205 × 150) + (210 × 250)
= 20,000 + 30,750 + 52,500 = 103,250
Total Volume = 100 + 150 + 250 = 500
VWAP = 103,250 ÷ 500 = ₹206.50
What is TWAP?
TWAP, or Time-Weighted Average Price, is an execution strategy in which a large order is divided into smaller parts and executed at equal intervals. The advantage of this is that it prevents sudden market pressure and allows the trade to be executed gradually. This method is often used when liquidity is low or the trader does not want their large order to be visible to the rest of the market.
TWAP Formula
TWAP = ( P₁ + P₂ + P₃ + … + Pₙ ) ÷ n
Where,
- P₁, P₂, P₃ … Pₙ = prices traded at different times
- n = total number of time intervals
Example: Suppose you need to buy 1,000 shares. You decide to split the order into 4 equal parts of 250 shares each and execute them at different times:
- 10 am – 250 shares at ₹200
- 11 am – 250 shares at ₹202
- 12 pm – 250 shares at ₹205
- 1 pm – 250 shares at ₹203
TWAP = (200 + 202 + 205 + 203) ÷ 4
= 810 ÷ 4
= ₹202.50
VWAP vs TWAP: Core Differences
| Criteria | VWAP (Volume-Weighted Average Price) | TWAP (Time-Weighted Average Price) |
|---|---|---|
| Calculation Method | VWAP = ( Σ (Price × Volume) ) ÷ ( Σ Volume ) | TWAP = ( P₁ + P₂ + P₃ + … + Pₙ ) ÷ n |
| Order Distribution Logic | Executes orders based on market volume | Order in equal parts at equal time intervals |
| Sensitivity to Volume | Highly sensitive where there is more volume, more orders will go there. | Independent of volume, based only on time |
| Best Suited Market | High liquidity stocks and indices | Assets with low liquidity or irregular volume |
| Pros | Orders blend with market trends, making benchmark comparison easier | Simple and predictable execution, low market impact |
| Cons | Sudden spikes in volume can distort VWAP, causing the executed price to deviate from the intended average. | TWAP executes orders at fixed intervals. If the market price moves unfavorably during an interval, the order for that interval will still be executed, which may result in a less-than-ideal price. |
| Best For Traders | Institutions and long-term investors with large orders | Options traders and those looking for steady execution in small tranches |
When Should Traders Use VWAP?
VWAP is a simple strategy and is beneficial when the stock is liquid and the order is large. This ensures the order flows smoothly into the market without significantly impacting the price.
- In liquid stocks : those with high daily volume VWAP integrates the order into market activity.
- For institutions : Mutual funds and large investors compare their buying and selling with VWAP to see if execution occurs near the market average.
- Reducing slippage : VWAP keeps the order close to the average price, preventing price distortion.
- When orders are not urgent : If time permits, VWAP executes orders slowly and provides a better price.
When Should Traders Use TWAP?
TWAP is useful when market liquidity is low and the order is large. The order is divided into equal parts and executed at fixed time intervals. The advantage is that the trade is executed gradually and there is no sudden pressure on the price.
- In low-liquidity stocks : where volume is low TWAP allows for order execution easily.
- In crypto and forex markets : volume is uneven in these markets, so TWAP is more useful.
- When not to signal the market : If you don’t want other traders to notice your large order, TWAP is the best option.
Read Also: Scalping vs Swing Trading: Which Strategy Fits You Best?
VWAP vs TWAP in Different Markets
- Widespread Use of VWAP in Equities : VWAP is most popular in the Indian equity market. This is because large-cap and liquid stocks have high daily volume. Therefore, VWAP smoothly integrates orders into the market flow, ensuring execution occurs around the average price. Mutual funds and institutional investors evaluate their trades using VWAP as a benchmark.
- When is TWAP used? : TWAP is less common in equities, but it is used in low-liquidity stocks or block deals. TWAP divides orders evenly over time, preventing sudden price pressure. In Indian markets, it is often used when an investor does not want the market to signal a large order.
- Trend of Hybrid Strategies : Many brokers and institutions are now using hybrid strategies by combining VWAP and TWAP. This makes execution more flexible. VWAP captures market volume, while TWAP provides time-based control. This approach is proving especially effective for large institutional desks.
Common Mistakes Traders Make with VWAP and TWAP
- Universal Use : Many traders think that VWAP and TWAP are useful for every trade. The truth is that VWAP is good for liquid stocks, while TWAP is suitable for stocks or assets with low liquidity.
- Ignoring Volume : VWAP operates on volume. If a stock has low volume and someone still executes a VWAP strategy, the execution will be inaccurate.
- Not Considering Market Timing : TWAP executes at fixed intervals. If the market price is unfavorable at that time, the trade may be executed at a less-than-ideal price.
- Blindly Following the Strategy : VWAP and TWAP are merely execution tools. If they are blindly followed without proper analysis and risk management, they can result in losses.
Read Also: Swing Trading vs Day Trading: Which Strategy Is Right For You?
Conclusion
Both VWAP and TWAP offer unique advantages depending on the trading scenario. VWAP works best for liquid stocks and large institutional orders, while TWAP is ideal for low-liquidity situations or when gradual, steady execution is preferred. In the Indian equity market, VWAP is more widely used, but TWAP also plays a valuable role. Ultimately, the right strategy depends on the trader’s objectives, order size, and market conditions. Choosing the approach that aligns with your trade can help achieve smoother execution and better results. It is advised to consult a financial advisor before trading.
Frequently Asked Questions (FAQs)
What is the main difference between VWAP and TWAP?
VWAP operates on volume, while TWAP executes orders at fixed time intervals.
Which is better for large orders?
VWAP is better for large orders in more liquid stocks.
Can retail traders use VWAP and TWAP?
Yes, but their impact on small orders is minimal.
Is VWAP commonly used in Indian markets?
Yes, in the Indian equity market, institutions use VWAP more.
When should I prefer TWAP?
When the stock is illiquid and orders need to be cleared slowly.
