# Probability of Stock Trade Using Standard Deviation Standard deviation assumes a bell curve of expected returns. stock market analysis screenshot image by .shock from Fotolia.com

Some professional stock traders use quantitative analysis to analyze the market and predict the future value of securities. They begin by assuming that the path of a stock will be a "random walk" and that the values will be distributed along a bell curve or a normal set of values. With this data, they can use standard deviation and probability theory to make investment decisions.

## Standard Deviation

Standard deviation is a measure that describes the probability of an event under a normal distribution. Stock returns tend to fall into a normal (Gaussian) distribution, making them easy to analyze. One standard deviation accounts for 68 percent of all returns, two standard deviations make up 95 percent of all returns, and three standard deviations cover more than 99 percent of all returns. When a trader can assume with a 95 percent probability where the stock value will be, he has many more options for hedging and investing.