DEFINITION of Frequency Distribution
Frequency distribution is a representation, either in a graphical or tabular format, that displays the number of observations within a given interval. The intervals must be mutually exclusive and exhaustive, and the interval size depends on the data being analyzed and the goals of the analyst. Frequency distributions are typically used within a statistical context.
BREAKING DOWN Frequency Distribution
As a statistical tool, a frequency distribution provides a visual representation for the distribution of a particular variable. Analysts often use it to show or illustrate the data collected in a sample. For example, the height of children can be split into several different categories or ranges. In 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 are that the intervals used must be non-overlapping and must contain all of the possible observations.
Frequency distributions can be presented as a frequency table, a histogram or a bar chart. Both histograms and bar charts provide a visual display using columns, with the y-axis representing the frequency count, and the x-axis representing the variable to be measured. In this example, the y-axis is the number of children, and the x-axis is the height. In general, the chart will show a normal distribution, which means that the majority of occurrences, or in this case children of a certain height, will fall in the middle column. In a histogram, the height of the column represents the range of values for that variable.
Frequency Distributions Used In Trading
Frequency distributions are not commonly used in the world of investments. However, traders who follow Richard D. Wyckoff, a pioneering trader in the early 20th century, use an approach to trading based on frequency distribution. Investment houses still use the approach, which requires considerable practice, to teach traders. The frequency chart is referred to as a point-and-figure chart and was created out of a need for floor traders to take note of price action and to identify trends. The y-axis is the variable measured, and the x-axis is the frequency count. Each change in price action is denoted in X's and O's. Traders interpret it as an uptrend when three X's emerge; in this case, demand has overcome supply. In the reverse situation, when the chart shows three O's, it indicates that supply has overcome demand.