how normal distribution is used in finance
the assumption of a normal distribution is applied to asset prices and price action traders may plot price points to fit recent price action into a normal distribution the further price action moves from the mean in this case the greater the likelihood that an asset is being over or undervalued traders can use the standard deviations to suggest potential trades this type of trading is generally done on very short time frames as larger timescales make it much harder to pick entry and exit points similarly many statistical theories attempt to model asset prices and assume they follow a normal distribution in reality price distributions tend to have fat tails and therefore have kurtosis greater than three such assets have had price movements greater than three standard deviations beyond the mean more often than expected under the assumption of a normal distribution even if an asset has gone through a long period where it fits a normal distribution there is no guarantee that the past performance truly informs the future example of a normal distributionmany naturally occurring phenomena appear to be normally distributed for example the average height of a human is roughly 175 cm 5 9 counting both males and females as the chart below shows most people conform to that average taller and shorter people exist with decreasing frequency in the population according to the empirical rule 99 7 of all people will fall with three standard deviations of the mean or between 154 cm 5 0 and 196 cm 6 5 those taller and shorter than this would be rare just 0 15 of the population each 