In this guide
The primary cause of skilled forecasters struggling in prediction markets isn't faulty forecasting — it's inadequate capital management. Even a sound probability assessment becomes worthless if a prolonged losing run depletes your entire stake. This guide outlines the defensive strategy that safeguards against this outcome.
The Kelly Criterion: The Mathematical Foundation
Kelly Criterion determines the theoretically ideal proportion of your stake to deploy on each individual trade: f = (bp - q) / b
- b = net odds received (e.g., if YES costs 0.40, b = 1.5)
- p = your probability estimate
- q = 1 - p
- Result: optimal fraction of bankroll for this position
In practice: use half-Kelly. Whilst Kelly delivers mathematical optimality under conditions of perfect probability knowledge, our estimates inevitably contain error margins, making half-Kelly the superior choice for risk-adjusted performance.
Hard Rules: Never Break These
- Maximum 5% of bankroll per single position — no exceptions regardless of conviction
- Maximum 25% of bankroll in any single correlated cluster — e.g., all US election markets
- Stop-loss: if you lose 25% of your starting bankroll in a month, stop trading for the rest of the month
- Never add to a losing position to "average down" — reevaluate the fundamental thesis first
Drawdown Recovery
Variance-driven losing phases occur routinely, even amongst traders with genuine edge. Upon experiencing a 20% drawdown, scale back your position sizes by half until you've climbed back to your previous peak. This approach shields you from a rough patch escalating into ruin.
FAQ
- How much starting capital do I need for serious prediction market trading?
- $500-1,000 furnishes sufficient funds to build a diversified portfolio spanning 10-20 trades using half-Kelly allocation. Below $100, sizing constraints prevent you from executing a disciplined, systematic methodology.
- What should I do after a winning streak?
- Increase your critical scrutiny, not your confidence. Successive wins breed complacency and poor judgment. Maintain your disciplined sizing framework irrespective of how your recent trades have performed.