What is TRWAP?
Trailing Weighted Average Price (TRWAP) calculates the exchange rate by assigning higher weights to more recent data points, reflecting recent market movements more accurately. A 5-day TRWAP will emphasize prices from the last couple of days compared to those at the beginning of the period.
Example (weights in brackets):
- Day 1: $1.00 (weight: 1)
- Day 2: $1.05 (weight: 2)
- Day 3: $1.10 (weight: 3)
- Day 4: $1.00 (weight: 4)
- Day 5: $1.15 (weight: 5)
TRWAP = (1×$1.00 + 2×$1.05 + 3×$1.10 + 4×$1.00 + 5×$1.15) / (1+2+3+4+5)
TRWAP = ($1.00 + $2.10 + $3.30 + $4.00 + $5.75) / 15 = $1.08
When to use TRWAP:
- When recent price movements significantly impact your decisions.
- In highly volatile markets or cryptocurrencies.
- For trading scenarios where timely responsiveness is crucial.
TWAP vs TRWAP: Key Differences
- Weighting: TWAP uses equal weighting across all days, while TRWAP emphasizes recent days.
- Responsiveness: TRWAP responds quicker to market changes, ideal in volatile markets. TWAP offers stability by smoothing out short-term fluctuations.
Choosing Between TWAP and TRWAP
Ask yourself:
- Is market volatility significant? Consider TRWAP.
- Do you prefer stability and predictable budgeting? Consider TWAP.
Understanding these differences helps you make informed, strategic financial decisions aligned with your business or trading objectives.