Amplitude (Securities) - Explained
What is Amplitude?
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Table of ContentsWhat is Amplitude?How Does Amplitude Work?What Constitutes a Peak or TroughDetermining Amplitude as Related to Peaks and TroughsCalculating Amplitude as a FormulaAcademics Research on Amplitude
What is Amplitude?
Amplitude is a measure of a change in a variable over a period of time, it also measures the degree of difference between the extreme values of a variable. In the context of securities or asset. Amplitude is the measure of the difference in the price of a security over a period of time. There are different definitions of amplitude as used in different contexts, this term can be used on physics to measure displacement.
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How Does Amplitude Work?
Generally, amplitude measures the movement of price from bottom to top (Peak) or from its wave cycle trough to the crest. Through this measurement, traders can determine the extent of the volatility of a security's price. The positivity or negativity of the amplitude shows the level of volatility present. The volatility of the price of security gives insight into the degree of risk entailed in the underlying security. When the amplitude is positive, it means the calculation is done from trough to peak (bottom to top), this is done when calculating bullish retracement in the market. On the other hand, when the amplitude is positive, a bearish retracement is being calculated.
What Constitutes a Peak or Trough
Simply put, a peak is the highest price a security can reach during a period of time, while trough refers to the lowest amount a securitys price at that same time. A single security can have a different peak and trough at different periods. While the peak is associated with periods of the market boom, the trough is associated with periods of depression in the market. An accurate understanding of peak and trough is crucial to help us know how an amplitude functions.
Determining Amplitude as Related to Peaks and Troughs
Amplitude is the measure of the difference between the midpoints of a peak and trough within a period of time. It finds out the displacement between the extreme ends of a variable, that is, the extent to which the midpoint of the peak and that of the trough are displaced. Usually, the midpoint of the peak and the midpoint of the trough signifies a zero point which means they can either make an upward movement (positive) or downward movement (negative). The midpoint of a securitys price is the mean price.
Calculating Amplitude as a Formula
Amplitude is calculated differently depending on what retracement is being calculated. For bearish retracement, the formula for calculating amplitude is; c b = a, This formula should be used where b precedes c on the x-axis. For bullish retracement, the formula is; b c = a, This formula should be used where c precedes b on the x-axis.