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Market Intelligence › Basic Terminologies
The lie of the normal distribution, and the real frequency of big moves
Published by The Retail Trader · AUG 02, 2026 · Risk Management
Most risk models assume that returns follow a normal distribution. The market does not follow it — big moves occur far more often than that model says.
Fat tails means there is more weight at the edges of the distribution — that is, a very large swing up or down is not as rare as theory says.
That is why statements like "this happens once in ten thousand years" are often built on the wrong model, not on real history.
These points are true for exactly this reason:
• The worst case derived from historical volatility often turns out too small.
• Leverage does the most damage in tail events, not on average days.
• Short volatility strategies give a small profit over a long time and then one big loss.
• So the estimate of maximum loss should be set by position size, not by a model.
You should apply a stress test to the whole portfolio: if the market falls sharply in a single week, where do you stand? That answer tells you about your strategy what a full year's average return never will.
This article is for education only — it is not a buy or sell recommendation, makes no claim of a guaranteed return, and is not advisory. Rules, rates and mechanics are changed from time to time by the exchanges, SEBI and RBI, so verify every number yourself with your broker or the official source.