Algorithmic Trading Strategies

lucacrebbe

Active Trader
Jun 26, 2017
108
1
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Hello I was reading about this in investitopia:

https://www.investopedia.com/articl...algorithmic-trading-concepts-and-examples.asp

I don't understand a thing, maybe because I am not native ebglish, would you please explain to me what does this mean?

I have 2 questions:

Question 1)

''Volume Weighted Average Price (VWAP)


Volume weighted average price strategy breaks up a large order and releases dynamically determined smaller chunks of the order to the market using stock-specific historical volume profiles. The aim is to execute the order close to the Volume Weighted Average Price (VWAP).''

What does it mean ''breaks uo a large order using stock specific hystorical volume profiles''?

What is this indicator ? (Historical volume profiles)? I have never heard about it. What does it shows to us?
Does it compute an average of all the volume traded in N days?

And why does it execute the order CLOSE TO the VWAP? Wouldn't it be better to execute it ABOVE, OR BELOW the VWAP?


Question number 2

Time weighted average price strategy breaks up a large order and releases dynamically determined smaller chunks of the order to the market using evenly divided time slots between a start and end time. The aim is to execute the order close to the average price between the start and end times, thereby minimizing market impact.


What does it means with ''releases dynamically determined smaller chunks of the order to the market using evenly divided time slots between a start and end time'' ?

Basically: I have a large sell order, I want to execute it above or close to the VWAP, then I split the order time to time until is it filled at my condition? Does this mean with that prhase?



 

Enivid

Administrator
Staff member
Nov 30, 2008
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Odesa
www.earnforex.com
What does it mean ''breaks uo a large order using stock specific hystorical volume profiles''?
It means to maximize the efficiency of large order execution by breaking it up into smaller orders to minimize the overall resulting price.
What is this indicator ? (Historical volume profiles)? I have never heard about it. What does it shows to us? Does it compute an average of all the volume traded in N days?
That's not a specific indicator, that's just historically significant price/volume levels.

And why does it execute the order CLOSE TO the VWAP? Wouldn't it be better to execute it ABOVE, OR BELOW the VWAP?
The aim is to reduce the influence of your small order-chunks on the market, so it is better to execute them exactly at those levels.

What does it means with ''releases dynamically determined smaller chunks of the order to the market using evenly divided time slots between a start and end time'' ?

Basically: I have a large sell order, I want to execute it above or close to the VWAP, then I split the order time to time until is it filled at my condition? Does this mean with that prhase?

For example, you want to open a position of 10 million shares in a market with not so great liquidity. You divide it into 100 orders of 100k shares each and execute each 30 seconds apart.
 

Chainika

Newbie
Dec 23, 2022
6
0
2
34
Hello I was reading about this in investitopia:

https://www.investopedia.com/articl...algorithmic-trading-concepts-and-examples.asp

I don't understand a thing, maybe because I am not native ebglish, would you please explain to me what does this mean?

I have 2 questions:

Question 1)

''Volume Weighted Average Price (VWAP)


Volume weighted average price strategy breaks up a large order and releases dynamically determined smaller chunks of the order to the market using stock-specific historical volume profiles. The aim is to execute the order close to the Volume Weighted Average Price (VWAP).''

What does it mean ''breaks uo a large order using stock specific hystorical volume profiles''?

What is this indicator ? (Historical volume profiles)? I have never heard about it. What does it shows to us?
Does it compute an average of all the volume traded in N days?

And why does it execute the order CLOSE TO the VWAP? Wouldn't it be better to execute it ABOVE, OR BELOW the VWAP?



Question number 2

Time weighted average price strategy breaks up a large order and releases dynamically determined smaller chunks of the order to the market using evenly divided time slots between a start and end time. The aim is to execute the order close to the average price between the start and end times, thereby minimizing market impact.

What does it means with ''releases dynamically determined smaller chunks of the order to the market using evenly divided time slots between a start and end time'' ?

Basically: I have a large sell order, I want to execute it above or close to the VWAP, then I split the order time to time until is it filled at my condition? Does this mean with that prhase?



Hi
Hi,
So, to answer your question 1,
VWAP is used by buyers who need to buy or sell a large number of shares but do not want to cause a spike in the volume as it attracts attention and affects the price.

To explain this further, let’s say as an institutional buyer, you are interested in buying 10,000 shares of Amazon. If you put an order of 10,000 the immediate action would be a spike in the price as the exchange fills the order.

Now, if other traders know that there is a significant demand for the share, they would ask for a higher price for the stock making it more expensive for the institution.

To avoid this scenario, you need to develop an automated trading strategy to divide the number of shares into smaller amounts and bid for the shares in such a way that their trades do not let the closing prices go far from the VWAP.

Since VWAP acts as a guideline on which certain traders base their trading decisions, it helps to keep the closing price as close to the VWAP as possible.

For question 2,
releases dynamically determined smaller chunks of the order to the market using evenly divided time slots between a start and end time
You simply divide the big order into several small orders using different time slots to execute each trade order at the desired price.
 

fargana

Active Trader
Nov 14, 2022
144
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It is also used to hide footprints of large players since when you have liquidity constraints you'd want to not spook other market players by placing large order.