DEFINITION of 'Amplitude'
The amplitude is the difference in price from the midpoint of a trough to the midpoint of a peak of a security, and it is positive when calculating a bullish retracement (when calculating from trough to peak) and negative when calculating a bearish retracement (when calculating from peak to trough).
Amplitude can be the amount of retracement in a price and is also the width of a channel in a range-bound market. Chart pattern analysis says that after a retracement, price will continue to move at least a distance equal to the retracement's amplitude.
BREAKING DOWN 'Amplitude'
The amplitude allows for an estimation of the volatility of a particular security. The larger the amplitude, either positive or negative, the more volatile the security is judged to be. The level of volatility can also denote the amount of risk present in a particular investment.
What Constitutes a Peak or Trough
A peak is identified as the highest price point a particular security reached during a specific period of time. With this understanding, the peak can vary depending on the time period under examination. The trough is the inverse of the peak. It represents the point at which the security had the lowest price during the same period of time. When related to a country’s gross domestic product (GDP), the trough represents the lowest point during an economic depression immediately preceding an upward shift towards recovery.
Determining Amplitude as Related to Peaks and Troughs
The amplitude represents the difference between the midpoint of the peak and the midpoint of the trough within a time period. Each midpoint is determined by finding the difference between the extreme, such as the aforementioned peaks or troughs, and the midline. The midline may resides at zero in cases where both positive and negative value are possible. In other cases, the midline may represent the mean price of a security in cases where negative values are not permissible. The amplitude is calculated by subtracting one midpoint from another.
Calculating Amplitude as a Formula
In order to calculate the amplitude, the value of a, the following formulas can be used assuming the value of b is the midpoint of the peak and the value of c is the midpoint of the trough.
For a bullish retracement, the formula, b – c = a, should be used where c precedes b on the x-axis. This will result in a positive amplitude, a, to denote the upward trend.
For a bearish retracement, the formula, c – b = a, should be used where b precedes c on the x-axis. This will result in a negative amplitude, a, to denote the downward trend.