In this guide
The primary factor behind skilled forecasters struggling in prediction markets isn't inaccurate forecasts — it's inadequate capital allocation. Even a well-calibrated probability assessment becomes worthless if a prolonged losing run depletes your entire account. This guide outlines the methodology to safeguard against that outcome.
The Kelly Criterion: The Mathematical Foundation
The Kelly Criterion determines the theoretically ideal proportion of your bankroll to allocate to 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. Whilst Kelly delivers mathematical optimality under certainty, our probability assessments contain inherent error margins, 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 — such as 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" — reassess your underlying thesis before committing further capital
Drawdown Recovery
Even profitable traders experience statistical downturns. Upon experiencing a 20% drawdown, decrease your position sizes by 50% until you restore your account to its previous peak. This approach contains a rough patch and prevents it from spiralling into account destruction.
FAQ
- How much starting capital do I need for serious prediction market trading?
- $500-1,000 furnishes adequate resources to construct a diversified portfolio spanning 10-20 positions using half-Kelly allocation. Below $100, sizing constraints prevent you from implementing disciplined, systematic approaches effectively.
- What should I do after a winning streak?
- Increase your scrutiny, not your risk appetite. Consecutive wins breed complacency and poor judgement. Maintain your disciplined allocation framework regardless of short-term results.