What Is Skewness?
Skewness measures the asymmetry of the return distribution—whether large gains or large losses are more frequent.
Quick Answer
Skewness measures the asymmetry of the return distribution—whether large gains or large losses are more frequent.
What Does Skewness Measure?
Skewness is the third moment of the return distribution. Positive skew means the right tail (large gains) is longer; negative skew means the left tail (large losses) is more pronounced. Many traders prefer positive skew: small frequent losses and occasional large gains. Negative skew can mean “picking up nickels in front of a steamroller”—small gains with rare but severe losses.
Skewness = E[(R - μ)^3] / σ^3 (μ = mean, σ = std dev)Typical range: Roughly -2 to +2 for many strategies; can be more extreme
How to Interpret Skewness
- 1Skewness > 0: right tail longer; more large positive returns
- 2Skewness < 0: left tail longer; more large negative returns
- 3Zero skew: symmetric distribution (e.g. normal)
- 4Option selling and mean reversion often show negative skew
How to Use Skewness in Backtesting & Portfolio Analysis
Common Mistakes to Avoid
Backtest with Skewness in VaultCharts
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