In this guide
The biggest reason talented forecasters fail at prediction markets is not bad predictions — it's poor bankroll management. A correct probability estimate means nothing if a single bad streak wipes your account. Here's the framework that prevents this.
The Kelly Criterion: The Mathematical Foundation
Kelly Criterion gives the theoretically optimal fraction of your bankroll to bet on each 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. Kelly is mathematically optimal for known probabilities, but since our probability estimates have uncertainty, half-Kelly provides better risk-adjusted outcomes.
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
Statistical downswings happen even with genuine edge. After a 20% drawdown, reduce position sizes by 50% until you recover to the previous high-water mark. This prevents a bad streak from becoming catastrophic.
FAQ
- How much starting capital do I need for serious prediction market trading?
- $500-1,000 provides enough capital to properly diversify across 10-20 positions using half-Kelly sizing. Under $100, position size constraints limit your ability to apply systematic principles.
- What should I do after a winning streak?
- Be more skeptical, not less. Winning streaks create overconfidence. Stick to your systematic sizing rules regardless of recent performance.