What is frequency distribution?
The frequency distribution is a representation, in graphical or tabular form, which displays the number of observations in a given interval. The size of the interval depends on the data analyzed and the analyst’s objectives. The intervals must be mutually exclusive and exhaustive. Frequency distributions are generally used in a statistical context. Generally, the frequency distribution can be associated with the graphical representation of a normal distribution.
|Interval||<3%||-3% to <0%||0 to 3%||> 3%|
Understanding the frequency distribution
As a statistical tool, a frequency distribution provides a visual representation of the distribution of observations in a particular test. Analysts often use frequency distribution to visualize or illustrate the data collected in a sample. For example, the size of children can be divided into several different categories or ranges. Measuring the height of 50 children, some are tall and some are short, but there is a high probability of a higher frequency or concentration in the middle range. The most important factors for data collection are that the intervals used should not overlap and should contain all possible observations.
Frequency distributions can be presented in the form of a frequency table, histogram or bar graph.
Histograms and bar graphs provide visual display using columns, the y-axis representing the number of frequencies and the x-axis representing the variable to be measured. In the children’s height example, the y-axis is the number of children and the x-axis is the height. The columns represent the number of children observed with heights measured in each interval.
In general, a histogram will usually display a normal distribution, which means that the majority of occurrences will fall in the middle columns. Frequency distributions can be a key aspect of graphing normal distributions that show observation probabilities distributed across standard deviations.
Frequency distributions in trading
Frequency distributions are not commonly used in the investment world. However, the traders who follow Richard D. Wyckoff, a pioneer trader of the early 20th century, use a trading approach that involves the distribution of frequencies. Investment houses still use this approach, which takes a lot of practice, to teach traders. The frequency chart is called a point and number chart and was created by a need for floor traders to take note of the price action and identify trends. The y-axis is the measured variable and the x-axis is the number of frequencies. Each price change is indicated in X and Os. Traders interpret it as an uptrend when three X’s emerge; in this case, demand has exceeded supply. In the opposite situation, when the graph shows three O’s, it indicates that supply has exceeded demand.