# Frequency Distribution: Definition and How It Works in Trading

![Frequency Distribution](https://www.investopedia.com/thmb/C_MchZJ5nnTIA70ndU7ubE-85yU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/frequencydistribution_definition_Final-1ed8cfa1febf44ec967764ec246ce912.jpg)

*— Sydney Saporito / Investopedia*

> **Definition**
>
> A frequency distribution is a statistical representation that quantifies the number of instances of distinct values or intervals within a dataset.

## What Is a Frequency Distribution?

A frequency distribution is a table or graph that shows how often values occur within specific intervals. It is commonly used in statistics to analyze quantitative data, such as census results or financial data in stock trading. Frequency distributions are usually linked to visualizing patterns like the normal distribution.  

### Key Takeaways

*   A frequency distribution is a statistical representation that displays how often things happen.
*   The representation of a frequency distribution can be graphical or tabular.
*   Frequency distributions are particularly useful for normal distributions, which show the observations of probabilities divided among standard deviations.
*   Traders use frequency distributions to take note of price action and identify trends.

## Understanding Frequency Distributions

As a [statistical](https://www.investopedia.com/terms/s/statistics.asp) tool, a frequency distribution provides a visual representation of the distribution of observations within a particular test. The frequency is how often a value occurs in an interval, while the [distribution](https://www.investopedia.com/terms/d/distribution.asp) is the pattern of frequency of the variable. They are often depicted in a graph or table. Analysts often use a frequency distribution to visualize or illustrate the data collected in a sample.

Frequency distributions can be used to identify trends and patterns in the datasets being analyzed. Researchers and statisticians can use them to study populations. They are also helpful for analysts and investors who can use them to compare and analyze investment possibilities.

Some of the possible applications include determining sales data and employee sentiment in business, asset performance and [risk management](https://www.investopedia.com/terms/r/riskmanagement.asp) in investing, demographical data in statistics, and consumer behavior in marketing.

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 for gathering data are that the intervals used must not overlap and must contain all of the possible observations.

To calculate frequency distribution:

1.  Calculate the range of the data set.
2.  Divide the range by the number of the group that you want your data in, then round up.
3.  Use class width to create groups.
4.  Find the frequency for each group.  
    

> **Important**
>
> The interval size of a frequency distribution depends on the data being analyzed and the goals of the analyst. The intervals must be mutually exclusive and exhaustive.

## Visual Representation of a Frequency Distribution

Both [histograms](https://www.investopedia.com/terms/h/histogram.asp) and bar charts provide a visual display using columns, where the y-axis represents the frequency count while the x-axis represents the variable to be measured. Using the example above, the y-axis is the number of children and the x-axis is the height. The columns represent the number of children observed, with heights measured in each interval.

A histogram chart will typically show a normal distribution, which means that the majority of occurrences will fall in the middle columns. Frequency distributions can be a key aspect of charting normal distributions that show observation probabilities divided among [standard deviations](https://www.investopedia.com/terms/s/standarddeviation.asp).

Frequency distributions can be presented as a frequency table, a histogram, or a bar chart. Below is an example of a frequency distribution as a table.

## Frequency Distribution in Trading

Frequency distributions are not commonly used in [investments](https://www.investopedia.com/terms/i/investment.asp). [Traders](https://www.investopedia.com/trading-4427765) who follow [Richard D. Wyckoff](https://www.investopedia.com/articles/active-trading/070715/making-money-wyckoff-way.asp), a pioneering early 20th-century trader, use an approach to trading that involves 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](https://www.investopedia.com/terms/f/floortrader.asp) 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 Xs and Os. Traders interpret it as an uptrend when three Xs emerge; in this case, demand has overcome supply. In the reverse situation, when the chart shows three Os, it indicates that supply has overcome demand.

## What Are the Types of Frequency Distribution?

The types of frequency distribution are grouped frequency distribution, ungrouped frequency distribution, cumulative frequency distribution, relative frequency distribution, and relative cumulative frequency distribution.

## What Is the Importance of a Frequency Distribution?

A frequency distribution is a means to organize a large amount of data and highlight trends and patterns. It takes data from a [population](https://www.investopedia.com/terms/p/population.asp) based on certain characteristics and organizes the data in a way that is comprehensible to an individual who wants to make assumptions about a given population.

## How Can I Construct a Frequency Distribution?

To construct a frequency distribution, first, note the specific classes determined by intervals in one column, then sum the numbers in each isolated category based on how many times it shows up. The frequency can then be noted in the second column.

## The Bottom Line

A frequency distribution is used to display the [number of observations within a particular interval](https://www.investopedia.com/terms/a/absolute_frequency.asp). This method, while not always commonly used in investing, is still used by some traders. In this case, the frequency chart is called a point-and-figure chart and is used to identify trends through the observation of price action.

> **Article Sources**
>
> 1.  Toppr. “[Frequency Distribution and Data: Types, Tables, and Graphs](https://www.toppr.com/guides/maths/data-handling/data-and-its-frequency-distribution/).”
>     
> 2.  Nasdaq. “[Point & Figure Basics](https://www.nasdaq.com/docs/DWA-Point-Figure-Basics_0.pdf),” Page 3.