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I was in the Wild Area in my copy of Shield near the Lake of Outrage, when a Milotic suddenly appeared in the Overworld. This surprised me because according to the in game Pokedex, Milotic's habitat is unknown. Huh?!

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might be unknown because you haven't encountered (or 'seen') it before. otherwise, not sure.
The thing is, the in game Pokedex still said habitat unknown after I caught the Milotic.
its probably a glitch then, or your game is hacked. did you get it used?
No. I pre-ordered the special sword and shield double pack and I'm the only one who has played it and I'm no hacker, so my guess is a glitch. But, I checked the Lake of Rage encounters both here on Pokemondatabase and on Serebii, and neither have Milotic listed as a possible encounter in any way.
yep, probably a glitch. sorry. but mayve theres still hope! are you ABSOLUTELY SURE that it was the lake of rage? also, was it actually just a feebas and it evolved into a milotic? that happened to me once with min- and cinccino
I have received word that LGPE also had 'habitat unknown' for Pokemon that just had highly rare spawn rates. It appears GameFreak carried that over to Sword and Shield. And yes I'm sure it was the Lake of Rage and Milotic. I went there to see what would spawn during the sandstorm and had just rode my bike onto the water when I spotted Milotic's blue and pink fan-like tail. It was a Milotic.

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There were several Pokémon in LGPE that were "area unknown" in the Pokedex, but in reality, had a rare chance to spawn in some areas. This appears to have carried over to SwSh as well, so this is almost definitely intentional. It's impossible for anyone other than Game Freak to definitively answer "why," but you can rest assured that your game isn't glitched.

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Ok. That makes me feel better. I was so confused.
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The thing is, some Pokemon can spawn at certain places and in different weather conditions. Milotic for example, will ONLY spawn in fog in Lake of Outrage, and many more only appear in certain weather conditions. But then, that is when you ONLY can see Milotic in the wild without having to evolve a Feebas.
If a Pokemon is only found as a rare spawn than the pokedex will not register it as findable