“the price we care the most about, is the price where the most volume is traded.”
Trading at the VWAP
- Build a volume a profile
- Slicing the orders to match
- Control for volume deviations
We use the volume-profile: “how much/what percentage of today’s volume happened in this chunk of the day” to predict today’s trading by matching by historical data. This often results in looking like a J curve: lots of trading happen at the beginning of the day, very little towards the middle, and LOTS in the end.
Slice your funds needed to trade, volume-wise, according to the Volume Profile. Set limit orders per slice at the best price for the market.
Control Deviations from Expectation
If you were’t able to trade by the limit order you posted at that slice, by the end of the slice, cancel your limit order and just send in a market order to ensure your participation with the desired volume at that slice.