After one takes enough trades, the results will follow a normal distribution where the probability of those returns will move between the mean and three standard deviations, either positive or negative, is approximately 99.7%. This means that the probability of returns moving more than three standard deviations beyond the mean is 0.3%. The fat tail theory states a very small percent of your trades will move beyond three standard deviations.
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A simpler version of the fat tail theory is Pareto’s Rule. The Pareto principle (also known as the 80/20 rule, the law of the vital few) as it relates to trading
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