Probability Distribution

A probability distribution is a mathematical function that provides the probabilities of occurrence of different possible outcomes for an experiment or observation. In finance, it is used to model the potential future prices of an asset.

Traders and risk managers analyze these distributions to understand the likelihood of extreme events, such as market crashes. Common distributions include the normal distribution, which is often used in basic models, and log-normal distributions for asset prices.

Recognizing the shape of the distribution is vital for setting stop-losses and managing portfolio risk. In crypto markets, distributions often exhibit heavy tails, meaning extreme events occur more frequently than predicted by a normal distribution.

Understanding this is key to building robust trading strategies that survive market volatility.