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Symmetrical Distribution


14 May 2022 00:00:00 | Update: 14 May 2022 00:47:38
Symmetrical Distribution

A symmetrical distribution occurs when the values of variables appear at regular frequencies and often the mean, median, and mode all occur at the same point. If a line were drawn dissecting the middle of the graph, it would reveal two sides that mirror one other.

In graphical form, symmetrical distributions may appear as a normal distribution (i.e., bell curve). Symmetrical distribution is a core concept in technical trading as the price action of an asset is assumed to fit a symmetrical distribution curve over time.

Symmetrical distributions can be contrasted with asymmetrical distributions, which is a probability distribution that exhibits skewness or other irregularities in its shape.

Symmetrical distributions are used by traders to establish the value area for a stock, currency, or commodity on a set time frame. This time frame can be intraday, such as 30-minute intervals, or it can be longer-term using sessions or even weeks and months. A bell curve can be drawn around the price points hit during that time period and it is expected that most of the price action—approximately 68% of price points—will fall within one standard deviation of the center of the curve. The curve is applied to the y-axis (price) as it is the variable whereas time throughout the period is simply linear. So the area within one standard deviation of the mean is the value area where price and the actual value of the asset are most closely matched.

If the price action takes the asset price out of the value area, then it suggests that price and value are out of alignment. If the breach is to the bottom of the curve, the asset is considered to be undervalued. If it is to the top of the curve, the asset is to be overvalued. The assumption is that the asset will revert to the mean over time. When traders speak of reversion to the mean, they are referring to the symmetrical distribution of price action over time that fluctuates above and below the average level.

Symmetrical distribution is most often used to put price action into context. The further the price action wanders from the value area one standard deviation on each side of the mean, the greater the probability that the underlying asset is being under or overvalued by the market. This observation will suggest potential trades to place based on how far the price action has wandered from the mean for the time period being used. On larger time scales, however, there is a much greater risk of missing the actual entry and exit points.

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