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Combining Chainlink TWAP and Order Book Imbalance for Polymarket Trading

#polymarket #trading #architecture #tutorial

Most Polymarket Trading bot strategies using TWAP focus on one question:

Is the current TWAP above or below the market strike?

That works as a foundation, but we can make the signal stronger by adding order book microstructure.

The idea is simple:

TWAP tells us where the reference price is. OBI tells us whether the underlying market is supporting the move.

What Is Order Book Imbalance?

Order Book Imbalance (OBI) measures the difference between bid and ask volume:

obi = (
    bid_volume - ask_volume
) / (
    bid_volume + ask_volume
)
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The value ranges approximately from -1 to +1.

OBI > 0  → buying pressure
OBI < 0  → selling pressure
OBI ≈ 0  → balanced order book
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For example:

Bid volume = 800
Ask volume = 400

OBI = (800 - 400) / (800 + 400)
    = 0.33
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An OBI of +0.33 indicates stronger bid-side pressure.

However, OBI should not be used alone. A single order-book snapshot can be extremely noisy.

Combining TWAP + Spot + OBI

Suppose we have:

Strike = $117,000
TWAP   = $117,150
Spot   = $117,350
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The relationship is:

Spot > TWAP > Strike
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This is already bullish.

Now add:

TWAP velocity > 0
OBI > +0.25
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Now four independent signals are aligned.

Strong UP Setup 

TWAP > Strike
TWAP velocity > 0
Spot > TWAP
OBI > +0.25
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Conceptually:

             Spot ↑
               │
             TWAP
               ↑
               │
             Strike

       Bid-side pressure
            OBI > +0.25
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The important point is that the strategy isn't simply saying:

"TWAP is above the strike, so buy UP."

Instead, it asks whether the underlying market is supporting the TWAP movement.

Strong DOWN Setup

The opposite conditions can be used for DOWN:

TWAP < Strike
TWAP velocity < 0
Spot < TWAP
OBI < -0.25
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Conceptually:

             Strike
               │
             TWAP
               ↓
               │
             Spot ↓

       Ask-side pressure
            OBI < -0.25
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When the reference price, spot price, momentum, and order book all point downward, the signal becomes stronger.

Don't Use Only One OBI Snapshot

One of the biggest problems with order-book signals is noise.

For example:

OBI = +0.40
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may look bullish, but one second later:

OBI = -0.05
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The original signal may have been temporary.

Instead, calculate OBI over multiple windows:

OBI_1s
OBI_3s
OBI_5s
OBI_10s
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For example:

OBI_1s  = +0.38
OBI_3s  = +0.34
OBI_5s  = +0.31
OBI_10s = +0.27
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This is much stronger than a single +0.38 reading because buying pressure is persistent across multiple time windows.

A Simple Signal Engine

We can combine these conditions into a basic signal:

def generate_signal(
    twap,
    strike,
    spot,
    twap_velocity,
    obi_1s,
    obi_3s,
    obi_5s,
    obi_10s,
):

    bullish_obi = (
        obi_1s > 0.25 and
        obi_3s > 0.25 and
        obi_5s > 0.25 and
        obi_10s > 0.25
    )

    bearish_obi = (
        obi_1s < -0.25 and
        obi_3s < -0.25 and
        obi_5s < -0.25 and
        obi_10s < -0.25
    )

    if (
        twap > strike and
        twap_velocity > 0 and
        spot > twap and
        bullish_obi
    ):
        return "UP"

    if (
        twap < strike and
        twap_velocity < 0 and
        spot < twap and
        bearish_obi
    ):
        return "DOWN"

    return "NO_TRADE"
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The NO_TRADE condition is important.

A good trading bot should not force a position when the signals disagree.

Why This Strategy Is Different

We are combining four types of information:

Signal What it tells us
TWAP vs Strike Current reference-price position
TWAP Velocity Direction of the reference price
Spot vs TWAP Whether spot is leading the TWAP
OBI Immediate order-book pressure

Think of it like this:

                TWAP
                 │
          Where is price?
                 │
                 ▼
          TWAP Momentum
                 │
          Is it moving?
                 │
                 ▼
           Spot vs TWAP
                 │
       Is spot leading?
                 │
                 ▼
               OBI
                 │
       Is order flow aligned?
                 │
                 ▼
            TRADE / WAIT
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The objective is not to predict every price movement.

The objective is to identify situations where multiple independent signals agree.

Important Risk Considerations

OBI is not a guaranteed directional indicator.

Orders can be cancelled, liquidity can disappear, and the order book can change extremely quickly.

You also need to account for:

  • Slippage
  • Trading fees
  • Market liquidity
  • Latency
  • Time remaining
  • Position size
  • Volatility

The +0.25 and -0.25 thresholds are starting examples, not universal optimal values.

They should be tested using historical data and out-of-sample validation.

Conclusion

A basic TWAP strategy asks:

Is TWAP above or below the strike?

A microstructure-aware Polymarket Trading bot asks a better question:

Is TWAP on the correct side of the strike, is it moving in that direction, is spot leading the TWAP, and is the order book supporting the move?

For UP:

TWAP > Strike
TWAP velocity > 0
Spot > TWAP
OBI > +0.25
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For DOWN:

TWAP < Strike
TWAP velocity < 0
Spot < TWAP
OBI < -0.25
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When these signals align, the strategy has much stronger confirmation than TWAP alone.

TWAP provides the reference.
Spot provides the leadership signal.
OBI provides the microstructure confirmation.

That combination creates a powerful foundation for a more advanced Polymarket TWAP trading strategy.

🤝 Collaboration & Contact
If you’re interested in building trading bots, buy trading bots, collaborating, exploring strategy improvements, or discussing about this system, feel free to reach out.

I’m especially open to connecting with:

Quant traders
Engineers building trading infrastructure
Researchers in prediction markets
Investors interested in market inefficiencies

📌 GitHub Repository
This repo has some Polymarket several bots in this system.
You can explore the full implementation, strategy logic, and ongoing updates about 5 min crypto market here:

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tags: #polymarket,#trading,#bot,#architecture,#tutorial,#TWAP

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