The Bell Curve- What is it in Lay mans

Quote from dtrader98:

All of these explanations are correct, particularly the preceding one. I think the expression you are thinking of, is to stay away from the tail ends of the bell curve.

The bell curve (like taco bell) is just a visual metaphor for a mathematical probability function, because when you graph it it looks like a bell. The events that are more likely to occur (like say a daily change of +/-1%) occur in the middle or fattest area of the curve. The outliers or tails are the smaller areas of the curve.


These are the unusual large changes that do not occur often; like an 87 style market drop. Although, in reality, markets do not exactly follow a bell curve, which is why IMO it's even worse than a bell curve would predict (that's why LTCM blew up).

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Perhaps he heard "avoid the bell curve" from someone who thought "pure random walk" when he said "bell curve" .... and as it is not possible to make profit from a pure random walk ... it should probably be better to avoid it ....
 
Great discussion gentlemen, great discussion.

The way you can increase the probability of any given "event" happening (in this case, a trade going into profitability) is to use a confluence of processes (indicators) which though similar in nature are different enough so that they will balance the other's weakness and create a blended tool for measuring probability.

Once this is done you see how it will be possible to generate events which have a likelihood of 80%, or 90% probability of happening.

However we have only measured the probability of an event happening (lets call it the X-axis), we now need the Y-axis, which is represented by length and duration of the event, once it has happened (in this case, how far a trade will move in your direction once it is in profit).

So you must also create a bell curve for these values to determine when is the "optimal" time to close a trade, and trade according to whatever profit target fits your purse and your psychology.

Always a pleasure,

Jimmy Jam
 
The bell curve is used in pricing options, supposing they have a normal distribution and random price movement.

While the market can NOT be forecasted with 100% accuracy, certainly it isn't random.
 
lies, damn lies and statistics :)

market data is not stationary, mean and standard deviation
change over time: a bell curve assumes constant mean and
standard deviation; so a bell curve is not useful here

the problem I have is the shape of the new distribution
and thinking I can trade it between oversupply and overdemand
extreme values, the market trends and forms another
distribution, in which the extreme values form the new 'middle'
i just started learning market profile, maybe that will help me
further

anyone also facing such a problem?

grtz,

Gaidaros
 
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