In this guide
The most common reason skilled forecasters struggle in prediction markets isn't inaccurate forecasts — it's inadequate bankroll discipline. Even a well-calibrated probability assessment becomes worthless if a prolonged losing run depletes your entire stake. This guide outlines the approach that safeguards against that outcome.
The Kelly Criterion: The Mathematical Foundation
Kelly Criterion determines the theoretically ideal proportion of your bankroll 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 perfect probability knowledge, our 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 — without exception, irrespective of confidence level
- Maximum 25% of bankroll in any single correlated cluster — for instance, all US election-related 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" — reassess your underlying thesis before committing additional capital
Drawdown Recovery
Temporary performance declines occur routinely, even amongst traders with genuine edge. Following a 20% drawdown, scale back your position sizes by half until you climb back to your previous peak. This approach prevents a rough patch from spiralling into total ruin.
FAQ
- How much starting capital do I need for serious prediction market trading?
- $500-1,000 furnishes sufficient funds to build a balanced portfolio spanning 10-20 positions using half-Kelly allocation. Below $100, sizing constraints become prohibitive and undermine your capacity to execute disciplined, systematic approaches.
- What should I do after a winning streak?
- Increase your critical thinking, not your risk appetite. Winning streaks breed complacency and false confidence. Maintain your disciplined sizing framework regardless of how recent results appear.