Baade, born the son of a schoolteacher in Schröttinghausen, Germany, was educated at the universities of Münster and Göttingen, where he obtained his PhD in 1919. He worked at the University of Hamburg's Bergedorf Observatory from 1919 to 1931, when he moved to America. He spent the rest of his career at the Mount Wilson and Palomar Observatories, retiring in 1958.

In 1920 Baade discovered the minor planet Hidalgo, whose immense orbit extends to that of Saturn. He was also, in 1949, to detect the minor planet Icarus, whose orbit, which lies within that of Mercury, can bring it very close to Earth. In the 1930s he did important work with Fritz Zwicky on supernovae, with Edwin Hubble on galactic distances, and with his old Hamburg colleague, Rudolph Minkowski, on the optical identification of radio sources.

Baade's most significant work however began in 1942. As he was of German origin he was precluded from the general induction of scientists into military research, being allowed to spend the war observing the heavens. In early 1943 he was blessed with ideal viewing conditions. Los Angeles was blacked out because of wartime restrictions and, for a short while, the air was calm and the temperature constant. Under these near-perfect conditions Baade took some famous photographs with the 100-inch (2.5-m) reflecting telescope of the central region of the Andromeda galaxy. To his great excitement he was able to resolve stars in the inner region where Hubble before him had found only a blur of light.

These observations allowed Baade to introduce a fundamental distinction between types of stars. The first type, Population I stars, he found in the spiral arms of the Andromeda galaxy. They were young hot blue stars as opposed to the Population II stars of the central part of the galaxy, which were older and redder with a lower metal content. This distinction, now much expanded, has played a crucial role in theories of galactic evolution.

Some of the stars that Baade observed in the Andromeda galaxy were Cepheid variables, stars that vary regularly in brightness. His realization that there were two kinds of Cepheids had an immediate impact. The relationship between period and luminosity of Cepheids, had been discovered by Henrietta Leavitt in 1912 and put into a quantified form by Harlow Shapley so that it could be used in the determination of stellar distances of great magnitude. In the 1920s Hubble had found Cepheids in the outer part of the Andromeda galaxy, and, using the period-luminosity rule, had calculated its distance as 800,000 light-years. Since then the relationship had been used by many astronomers.

Baade, by 1952, was able to show that the original period-luminosity relationship was valid only for Population II Cepheids whereas Hubble's calculation involved Population I Cepheids. Baade worked out a new period-luminosity relationship for these Cepheids and found that the Andromeda galaxy was two million light-years distant.

The distance to the Andromeda galaxy had been used by Hubble to estimate the age of the universe as two billion years. Baade's revised figure gave the age as five billion years. This result was greeted with considerable relief by astronomers as Hubble's figure conflicted with the three to four billion years that the geologists were demanding for the age of the Earth. Further, with Baade's revision of the distance of the Andromeda galaxy without any change in its luminosity, it was now clear that its size must also be increased together with the size of all the other galaxies for which it had been a yardstick. Baade was thus able to establish that while our Galaxy was somewhat bigger than normal it was not the largest, as Hubble's work had implied.