Reviewed by Aug 27, 2020| Updated on
The frequency distribution is a representation that shows the number of observations within a given interval, in either a graphical or a tabular format. The size of the interval depends on the analysed data and the analyser's goals. The intervals have to be exhaustive and mutually exclusive. Usually, frequency distributions are used in a statistical sense. In general, the distribution of frequencies can be associated with a normal distribution chart.
A frequency distribution, as a statistical method, provides a visual representation for the distribution of observations within a given study. Analysts also use the distribution of frequencies to display or explain the data obtained in a sample.
For starters, children's heights may be divided into many different categories or ranges. Some are tall when calculating the height of 50 children, some are low, but there is a high chance of a higher frequency or concentration in the middle range. The key criteria for data collection are that the intervals used do not overlap and must include all possible observations.
Usage in Trading
Frequency distributions are not widely used in the investment world. However, traders who imitate Richard D. Wyckoff, a pioneering trader in the early 20th century, use a frequency distribution approach to trading. Investment houses are still using the method of teaching traders which needs considerable practice.
The frequency chart is referred to as a point-and-figure chart, which was developed as a result of the need for floor traders to take note of market activity and recognise patterns. The y-axis is the measuring element, and the X-axis is the count of frequencies. Any price shift is denoted in Xs and Os. If three X's arise, traders view it as an uptrend; in this case, demand has exceeded supply. When the chart shows three O's in the reverse situation, it means that supply has exceeded demand.