In this guide
The primary cause of failure among skilled forecasters in prediction markets is not inaccurate forecasting — it's inadequate capital preservation strategy. Even a precisely calibrated probability assessment becomes worthless if a prolonged losing run depletes your entire stake. This guide outlines the essential methodology for avoiding such ruin.
The Kelly Criterion: The Mathematical Foundation
Kelly Criterion determines the mathematically ideal proportion of your capital 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. Although Kelly delivers mathematical optimality under conditions of perfect probability knowledge, our estimates contain 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 losses occur regularly, even when you possess a genuine advantage. Following a 20% decline in capital, scale back your position sizes by half until you climb back to your previous peak. This safeguard ensures that unfavourable market conditions do not escalate into account destruction.
FAQ
- How much starting capital do I need for serious prediction market trading?
- £350–700 (or equivalent) furnishes adequate resources to build a diversified portfolio spanning 10-20 positions using half-Kelly allocation. Below £70, sizing constraints prevent you from implementing disciplined, systematic approaches effectively.
- What should I do after a winning streak?
- Increase your caution, not your confidence. Consecutive wins breed complacency and poor judgment. Maintain your predetermined sizing discipline irrespective of how recent trades have performed.