An Introduction to Skewness Trading
Many statistical measurements and concepts are needed by traders. Skewness affects financial asset price and returns.
Define Skewness.
Skewness measures asymmetric probability distributions. In trading, it helps assess return or price dispersion. Statistics like skewness help traders identify risks and make informed trades.
Skewness suggests left, right, or symmetrical distribution. Symmetrical distributions have coincident mean, median, and mode and zero skewness. A distribution with positive skewness has a concentration of lower returns or prices and may include significant positive outliers in the right tail. Left-sided tails with negative skewness concentrate higher returns or prices and severe negative outliers.
Why Is Trading Skewness Important?
Skewness affects commerce for numerous reasons:
Skewness helps traders assess investment and trading strategy downside and upside risks. Positive and negative skewness indicate positive and negative outliers, respectively.
By locating assets with different skewness, traders may diversify their portfolios. Portfolios with positive, negative, or zero skewness may balance risk and return.
Trading methods: Skewness impacts trading. Understanding a market or asset’s skewness may help traders choose long or short positions depending on returns or price.
Skewness Calculator
The most common statistical formula for skewness estimation is Pearson’s First Coefficient (Moment Coefficient).
Pearson’s First Skewness Coefficient Formula:
Skewness is three times mean minus median/standard deviation.
To assist traders analyze datasets, software and trading platforms may incorporate skewness tools.
Conclusion
Skewness must be understood and used to trade effectively. By assessing asset returns or price distribution skewness, traders may detect risks, diversify portfolios, and make informed trading decisions.
Sources and Links
Investopedia (2021). Skewness. Retrieved from https://www.investopedia.com/terms/skewness.asp
Corporate Finance Institute (n.d.). Skewness in Stats. Wikipedia (2021). Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/other/skewness/. Skewness. Source: https://en.wikipedia.org/wiki/Skewness