Never under-perform the average price of the market with these techniques.
Are you a gifted trader with a natural ability to always “beat the market” with your buying and selling of stocks? If so, you should count your blessings. For the rest of us, achieving average pricing is a good thing!
Let’s face it – buying and selling stocks can be intimidating and figuring out how to get the best price when you buy or sell a stock can leave an investor with a knot in their stomach. The good news is that there are several techniques that can be put in place to obtain the daily average of the price of a given stock.
Professional traders leverage Algorithmic trading (a.k.a. algo trading) to place trades allowing computers to handle the hard work in trying to find a “best price” as they purchase and sell stocks.
There are many different kinds of algorithms available for the sophisticated trader but for most folks there are just two that they can start with to help achieve average or slightly better than average performance. These are the VWAP and TWAP.
VWAP = Volume Weighted Average Pricing, placing stock trades according to where the greatest volume is occurring around price action.
TWAP = Time Weighted Average Pricing, placing stock trades at a consistent pace over a pre-defined period of time.
VWAP generally places trades where most of the market action is, helping the trading action to not negatively impact price performance. TWAP allows one to obtain prices that may be beneficial but atypical relative to where the greatest price action has been. One can even combine both methods to create a hybrid approach. Either way, the end result is price performance that is very close to or better than the average price for the entire days trading. This doesn’t guarantee getting the absolute best price at all times, but it does protect against getting the worst price.
Algo trading is available at Interactive Brokers for all accounts. ThinkorSwim (a division of TD Ameritrade) offers algo trading to investors with at least $250,000 in their accounts via their ThinkPipes platform. At the time of this writing, we are unaware of algo trading being available with folks like eTrade, Schwab, or others.
If your broker doesn’t offer Algo trading, you still have options! One technique is to place 50% of your trade at the open with the other 50% directly at the close. While you will capture the extremes of the trading range, this will actually create an average price that is typically close to VWAP.
Because so much of the daily volume happens at the beginning and ending of the day, the chances of causing pricing problems in the market with this technique are minimal, particularly if you are never buying or selling more than 2% of the average daily volume.
If you are investing a larger sum of money but less than what is required to qualify for algo trading with your broker, you can stage your orders so they occur at specific times through the day. For example you might set your orders for every 2 hours in the trading day.
While working with any of these methods can increase trading costs, the investment is worth it in guaranteeing that you’ll avoid under-performing the market.
The key is making sure you work with a brokerage that offers the lowest trading costs possible with the best quality of trade execution.
Coming Up Next
Back | Course 10: Setting trades up in a low stress way and the protective power of scaled investing.
