Traders use symmetrical distributions to determine the value area for a crypto asset over a specific time frame. It is a widely used type of crypto technical analysis. But what is symmetrical distribution? Let's take a deep dive!
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<source: medium.com>
When the values of variables occur at regular intervals, a symmetrical distribution is formed. In this case, the mean, median, and mode are frequently found in the same location. For a perfectly symmetrical distribution, the mean has to be equal to the median and the mode. In other words, in case of a symmetrical distribution, the mean, mode, and median all fall at the same point. The mode here corresponds to the highest peak of the graph.
Notably, a skewed distribution is one that is not symmetrical. A skewed distribution can be either positive or negative.
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<source: wikimedia>
This can happen if the data set contains outliers. Outliers are observations with unusually large values. If the outliers are above the mean, the distribution will be skewed to the right. In other words, a positively skewed distribution has a long tail on the right side. This indicates that small losses are frequent and large gains are rare. The mean will be greater than the median, and the median will be greater than the mode in this case.
Meanwhile, if the outliers are below the mean, the distribution will be negatively skewed. Stated otherwise, a negatively skewed distribution has a long tail on the left side. This indicates that small gains are frequent and large losses are rare. In this case, the mean is less than the median, and the median is less than the mode.
As stated earlier, symmetrical distribution requires the study of a digital asset's performance over a specific time frame. This time frame can be intraday, such as a 30-minute interval, or it can be longer-term, such as sessions, weeks, or even months. A bell curve can be drawn around the price points reached during that time period. It is expected that the majority of the price action (around 68% of price points) will fall within one standard deviation of the curve's center.
Suppose the price action moves the asset price out of the value zone. This indicates that price and value are out of sync. The asset is considered undervalued if the breach is at the bottom of the curve. And if it reaches the top of the curve, the asset is overvalued. The asset is expected to revert to the mean over time. So next time you hear a trader talking about reversion to the mean, you will know that they're talking about the symmetrical distribution of price action over time. It fluctuates above and below the average level.
The symmetrical distribution is most commonly used to contextualize price action. The further the price action deviates from the value area by one standard deviation on either side of the mean, the more likely it is that the market is under or overvaluing the underlying asset. This observation will recommend potential trades based on how far the price action of a crypto asset has deviated from the mean for the time period in question.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.