What it measures
Skewness describes whether a strategy's returns are lopsided. A perfect bell curve has zero skew.
| Skew | Shape | Typical of |
|---|---|---|
| Negative | Frequent small gains, occasional large losses | Selling options, carry trades, many "high win rate" systems |
| Near zero | Balanced | Broad index funds, roughly |
| Positive | Frequent small losses, occasional large gains | Trend-following, venture investing, lottery-like stocks |
Why it matters
Negatively skewed strategies look excellent for years: high Win rate and payoff ratio, smooth returns, a high Sharpe ratio. The risk only appears in a crash. Positively skewed strategies feel painful but protect against disasters.
Reading it
Daily stock index returns have mild negative skew. A backtest with strong negative skew (below about -1) deserves a close look at its worst days and at Maximum drawdown.
See also
- Kurtosis and fat tails What kurtosis measures, why stock returns have fat tails, what excess kurtosis means, and why extreme days happen far more often than a bell curve predicts.
- Tail ratio The tail ratio compares a strategy's best days with its worst days. How it is calculated from percentiles and what values above or below 1 tell you.
- Win rate and payoff ratio What win rate means for a trading or investing strategy, why a high win rate can still lose money, and how win rate and payoff ratio combine into expectancy.
- Sharpe ratio What the Sharpe ratio measures, how to calculate it from returns and volatility, what counts as a good Sharpe ratio, and where it misleads.
Last updated September 30, 2026. Education only, not investment advice.