When programming trading algorithms, you have to set parameters that your program will react on. Similarly, market participants use technical trend indicators such as the VWAP (Volume-Weighted Average Price) and the 8EMA (Exponential Moving Average with an 8-period setting), to time their order entry and exit. These two popular indicators serve different purposes and can be suitable for different situations. Even if you do not intend to use them, you should understand how they trigger movements (since they are used by others!). Here’s an overview of the differences between these two indicators and their applications:

1. VWAP (Volume-Weighted Average Price):

   • VWAP is a price indicator that takes into account both the price and the volume of trades. It is calculated by summing up the total dollar value traded for each period and dividing it by the total volume of shares traded during that period.
   • VWAP provides a measure of the average price at which a security has traded throughout the day, weighted by volume.
   • It is often used to identify the “fair” price at which a stock should be trading, based on the day’s volume profile. You can use VWAP to gauge whether a stock is currently overbought or oversold. (Imagine that the price is by default drawn as a magnet towards the VWAP.)
   • VWAP is particularly useful for identifying intraday support and resistance levels, and traders often use it as a reference point for making trading decisions.
   • If you have an investment manager or trader working for you, you can grade his expertise (or luck/karma) based on his trade price of the day vs the VWAP of the day.

2. 8EMA (Exponential Moving Average with an 8-period setting):

   • The 8EMA is a technical indicator that calculates the average price of a security over a specified number of periods, giving more weight to recent data points. In the case of an 8-period EMA, it emphasizes the most recent eight data points.
   • The 8EMA is a trend-following indicator that responds quickly to recent price movements. When the 8EMA is above the stock’s current price, it suggests a short-term bullish trend, and when it’s below the price, it suggests a short-term bearish trend.
   • Traders often use the 8EMA to identify short-term momentum and potential trend reversals.

Situations where each indicator may be suitable in day trading:

• VWAP:

  • Use VWAP to identify potential reversals or trend confirmation points during the trading day. When a stock is trading above VWAP, it may be considered bullish for the day, and traders might look for opportunities to go long. Conversely, when a stock is trading below VWAP, it may be considered bearish, and traders might consider short positions.
  • VWAP is particularly useful during the early part of the trading day when establishing a trading bias based on the stock’s relationship with VWAP.

• 8EMA:

  • The 8EMA is valuable for short-term traders who want to capitalize on quick price movements. It provides a simple and clear signal for identifying short-term trends.
  • Use the 8EMA to gauge the momentum of a stock during the day. When the 8EMA crosses above the stock’s price, it can indicate a bullish move, and when it crosses below, it may signal a bearish move.

VWAP and 8EMA are complementary indicators used for different purposes. VWAP helps traders assess the day’s overall price and volume dynamics, while 8EMA is more focused on short-term trend identification. You can use both indicators in conjunction with other technical tools to make informed trading decisions or to program your application to them for you.