In this guide
The primary cause of skilled forecasters struggling in prediction markets is seldom inaccurate forecasts — it's inadequate capital preservation. Even a well-calibrated probability assessment becomes worthless if a prolonged losing run depletes your entire stake. This guide outlines the methodology that safeguards against that outcome.
The Kelly Criterion: The Mathematical Foundation
Kelly Criterion determines the theoretically optimal proportion of your stake to allocate to each wager: 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, real-world estimates carry inherent uncertainty, 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
Temporary performance declines occur routinely, even among traders with genuine edge. Following a 20% decline in account value, scale back all position sizes by half until you restore your previous peak. This mechanism shields you from a rough patch escalating into complete ruin.
FAQ
- How much starting capital do I need for serious prediction market trading?
- $500-1,000 furnishes adequate resources to build a diversified portfolio spanning 10-20 separate positions using half-Kelly methodology. Below $100, sizing constraints become prohibitively restrictive and undermine the application of disciplined frameworks.
- What should I do after a winning streak?
- Increase caution rather than confidence. Successful runs breed complacency and poor judgment. Maintain adherence to your predetermined sizing discipline irrespective of current momentum.