Algorithmic trading strategies in crypto
Algorithmic trading has become a go-to for many traders as it lets you automate trades based on specific rules — no emotions, no hesitation, just pure logic. These strategies can scan markets 24/7, react instantly to price movements, and handle large volumes way faster than a human ever could.
Some common algo trading strategies include:
Now, within the world of algorithmic trading, there’s a special group called execution algorithms. These aren’t about predicting where the market is going — they’re about how to get in or out of a position without moving the market too much. They’re especially useful for handling large orders discreetly.
A key subset of these is passive order execution strategies. These aim to minimize slippage and get you as close as possible to a fair average price. The two big names here are:
- Time-weighted average price (TWAP): splits your order into equal parts over time, ignoring volume. It’s great for low-liquidity situations or when you want to stay under the radar.
- Volume-weighted average price (VWAP): adjusts your trade size based on market volume, placing bigger trades when activity is higher.
Both help you avoid tipping off the market and are essential tools in the crypto trader’s toolkit.
What is time-weighted average price (TWAP)?
TWAP, or time-weighted average price, is one of the simplest and most widely used execution strategies in algorithmic crypto trading.
At its core, TWAP helps traders break down a large order into smaller trades, executed evenly over a set period of time — regardless of market volume. The goal? To get an average price that reflects time, not market activity, and to avoid causing sudden price moves.
This strategy is especially useful in two scenarios: when you’re trying to quietly execute a large trade without alerting the market and when you’re trading in low-liquidity environments where even moderate orders can move prices. By pacing your trades, TWAP helps reduce slippage and keeps your activity under the radar.
Its biggest strength is its simplicity — it’s easy to implement and understand. But that simplicity also comes with a tradeoff: TWAP doesn’t account for trading volume. So, during high-volatility periods or sudden market shifts, it might miss key signals and give you an execution price that doesn’t reflect the true state of the market.
In short, TWAP is a great option when you need to trade steadily over time, especially in quieter markets. But if volume and volatility are major concerns, it might not always give you the best result.
Did you know? You can easily add TWAP (time-weighted average price) to your trading setup on platforms like TradingView by simply opening your chart, clicking “Indicators” and searching for “TWAP.”
How to calculate TWAP
To calculate TWAP, you take the price of the asset at regular time intervals, add them all up, and divide by the number of times you checked the price.
Here is the formula to calculate TWAP:
In layman’s terms, the formula looks like this:
TWAP = (Price₁ Price₂ … Priceₙ) / n
Let’s walk through an example.
Say you check the price of Bitcoin (BTC) every 10 minutes and get the following:
90,000 → 90,100 → 89,900 → 90,050
Now add them together:
90,000 90,100 89,900 90,050 = 360,050
Then divide by the number of intervals (4):
TWAP = 360,050 ÷ 4 = 90,012.5
What is volume-weighted average price (VWAP)
VWAP stands for volume-weighted average price, and it’s a go-to metric for traders who want a more realistic sense of an asset’s average price throughout the day.
Unlike TWAP, which just averages prices over time, VWAP factors in how much volume was traded at each price. That means prices with more trading activity carry more weight in the final average — making it a better reflection of where the market actually values the asset.
Traders often use VWAP as a benchmark. If you buy below VWAP, you’re likely getting a better-than-average deal compared to the rest of the market. It’s also handy for spotting trends — if the current price is above VWAP, the market’s probably bullish; if it’s below, that could be a bearish signal.
VWAP has its advantages: It gives a more accurate picture of market value and can help identify when an asset might be overbought or oversold. But it’s not perfect. It’s more complex to calculate and can get thrown off by a few unusually large trades, which might skew the average.
All in all, VWAP is a powerful tool for traders who want deeper insight into market dynamics, but like any indicator, it works best when used alongside other signals.
Did you know? The term volume-weighted average price (VWAP) was first introduced to the trading community in a March 1988 Journal of Finance article titled “The Total Cost of Transactions on the NYSE” by Stephen Berkowitz, Dennis Logue, and Eugene Noser Jr. In this paper, the authors presented VWAP as a benchmark for assessing the quality of trade executions by institutional investors.
How to calculate VWAP
VWAP works a bit differently. Instead of treating each price equally, it gives more weight to prices where more trading volume occurs.
Here is the formula to calculate VWAP:
In plain terms, the formula is:
VWAP = (Price × Volume at each point, all added up) ÷ Total Volume
Let’s go through an example.
Say you have this data for BTC:
- 90,000 at 10 trades
- 90,100 at 20 trades
- 89,900 at 5 trades
- 90,050 at 15 trades
First, multiply each price by its volume:
- 90,000 × 10 = 900,000
- 90,100 × 20 = 1,802,000
- 89,900 × 5 = 449,500
- 90,050 × 15 = 1,350,750
Now add those results:
900,000 1,802,000 449,500 1,350,750 = 4,502,250
Then calculate the total volume:
10 20 5 15 = 50
Finally, divide the total value by the total volume:
VWAP = 4,502,250 ÷ 50 = 90,045
When to use TWAP vs. VWAP?
It really comes down to what kind of trade you’re making and what the market looks like at the time.
If you’re trading during busy hours and want to make sure you’re not overpaying — or underselling — compared to where most of the action is happening, VWAP is your friend. It gives you a sense of the market’s “true” average price by factoring in volume, so it’s great for benchmarking your trades or timing your entry and exit in line with market momentum. If you’re buying below VWAP, you’re likely getting a solid deal.
TWAP, on the other hand, is better when you’re trying to stay under the radar. Maybe you’re dealing with a less liquid coin, or you’re trading at a quieter time of day when volume is all over the place. In that case, TWAP helps you slowly work your way into or out of a position without spooking the market. It doesn’t care about volume — it just paces your trade out over time in equal chunks.
So, big picture: Use VWAP when you’re following the crowd and want to time things smartly. Use TWAP when you’d rather move quietly and keep things simple.
TWAP vs. VWAP: Key differences to be aware of
TWAP and VWAP in crypto trading
Traders and institutions use TWAP and VWAP to minimize market impact and secure better execution prices.
Let’s look at two real-world examples that show how these algorithms perform when the stakes are high.
1. Strategy’s $250-million Bitcoin buy with TWAP
Back in August 2020, Strategy (called MicroStrategy at the time) made headlines by announcing a $250-million investment in Bitcoin (BTC) as a treasury reserve asset. Rather than entering the market all at once — and risking a sharp price jump — they partnered with Coinbase and used a TWAP strategy.
By spreading the purchase out over several days, Strategy was able to blend into market activity, minimizing slippage and securing a favorable average price.
2. Definitive’s TWAP strategy for Instadapp (INST)
A major crypto VC firm used TWAP to handle a large position in Instadapp (INST), a decentralized finance token known for its low liquidity. Over two weeks in July 2024, it executed the trade in small chunks using Definitive’s TWAP algorithm.
The result was a 7.5% improvement over what it would’ve paid using VWAP, and gas fees made up just 0.30% of the $666,000 order. It was a clear win in terms of both cost-efficiency and stealth execution.
3. Kraken Pro and the use of VWAP
Kraken offers advanced trading capabilities through its Kraken Pro platform, which includes VWAP as a built-in technical indicator for traders. On Kraken Pro, users can access VWAP directly in the charting interface, powered by TradingView integration, to analyze crypto assets across various timeframes.
For instance, a trader on Kraken Pro might use VWAP to optimize a Bitcoin trade. They could set up an order to buy BTC when the price dips below the daily VWAP — indicating it’s trading below the volume-weighted average and potentially undervalued — and sell when it rises above, suggesting overvaluation or profit-taking opportunities.
Institutional clients and high-volume traders, in particular, rely on Kraken’s VWAP functionality for precision in the fast-moving crypto market.
Whether you’re managing a big order or just trying to get a fair entry, knowing when and how to use both TWAP and VWAP can give you a serious edge in the market.
Happy crypto trading!
