What Options and Benefits Are There to TWAP?
Options are a good way of trading if you have the right strategy. Options change from time to time and an investor has always to be on the lookout. One of the strategies traders use is TWAP.
Understanding TWAP is easy. An investor needs to know that it involves time and the sampling period. When trading, a trader decides on the periods when they want to call for an option. during this time, the stock is recorded once. The recorded samples are added together at the end of the trading period and divided by the number of samples so as to determine the average. The formula used is Typical Price = (Close + High + Low + Open)/4, with 4 being the number of samples.
The main reason for the use of TWAP is to trade large stocks without being noticed. For instance, when you purchase 100,000 shares of stock from Facebook once, It might make the value of the stock to increase, Which is not good for the market. This is where TWAP comes in handy. The large stocks can be divided into smaller units and purchased without creating attention over a period of time. This is an option where traders can easily exploit the market as opposed to using other strategies like the use of VWAP.
However, because many of the stocks change from time to time due to a large number of trading activities especially with the large companies, it is important to choose the trading periods carefully. It is also important to indicate that there are other investors online and offline that have algorithms that can detect a pattern in your trades. In order to avoid such predators from taking advantage and driving you to a loss, it is important that your trade is not consistent. You need to randomize your options. For a sample example, do not use a series of 25%, 25%, 25%, and 25 %. It is advisable to use something like 25%, 45%, 15%, and lastly 5%.
The choice of a stock is also important when using TWAP. Choose one that is easy to locate. There are those that are too complicated and all they will do is to waste your time. Before you make a call the time will have already expired. Choose those that can be determined by only looking. They play a significant role in ensuring that you are in a better place of making the right decisions. Also, make sure that you trade on orders that are close to average price between the time when the trade starts and the time when the trade ends.
As much as TWAP is beneficial and can generate a lot of income within a short period of time, it is important to be very fast when making calls. It is also important to have insights into the market of trade and know when to make your calls. Accuracy is also another element because in most cases the stocks change in a split second impulse. Lastly be aware of cyber attacks and predatory investors.
- H Kent Baker, Greg Filbeck. "Portfolio Theory of Management" (2013), pp.421
- Barry Johnson "Algorithm & Trading DMA - An introduction to Direct Access Trading Strategies" (2010), pp. 123=126