Trading Prediction Markets

Syllabus

1. Module 1

   Edge and expected value

   What a trade is worth before you make it: expected value per share and per dollar, the break-even price once costs are in, why a 95¢ contract is not a safe bet, and how to tell a real edge from a pattern in old prices.

   1. Expected value per share and per dollar15 min

      The arithmetic every trade rests on: what a share is worth at your probability, what it costs once you cross the spread and pay the fee, and the no-trade zone in between.

      Objectives

      • Calculate the expected value of buying Yes or No at a given price, per share and per dollar.
      • Work out the break-even probability of a trade once spread and fees are included.
   2. The 95¢ contract and the 3¢ ticket15 min

      Why buying near-certain outcomes is not free money, how to annualise their return, how many wins one loss erases — and what the long-shot lottery looks like from the inside.

      Objectives

      • Annualise the return of a high-priced contract and compare it with another use of the money.
      • Work out how many wins a single loss erases on a high-priced contract.
   3. Is it really an edge?15 min

      Where trading edges come from, which of them last, and a five-point check for any pattern you think you have found in past prices.

      Objectives

      • Name the source of an apparent edge and judge whether the market could already know it.
      • Test a pattern in past prices for sample size, cause, cost, persistence and capacity before trading on it.

   Module check

   10 questions drawn from the module's pool, pass mark 80%. Retake it as often as you like: every retake draws new questions, and you see the answer and explanation for each one.

2. Module 2

   Sizing

   How much to put on a trade you like: the Kelly fraction and why most traders use a fraction of it, what losing streaks and drawdowns really look like, and how to size positions that depend on the same outcome.

   1. The Kelly fraction and its fractions16 min

      The stake that grows a bankroll fastest, why it is larger on expensive contracts, and why betting half of it keeps most of the growth while forgiving most of your mistakes.

      Objectives

      • Calculate the Kelly fraction of a bankroll for a binary contract from your probability and the price.
      • Explain why fractional Kelly is the safer choice when your probability is an estimate, and size a fractional stake.
   2. Streaks, drawdowns and the bankroll15 min

      What losing streaks look like with a real edge, how deep a run of losses cuts at a given stake, why the climb back is always steeper than the fall, and the rules that keep a bankroll alive.

      Objectives

      • Estimate the chance of a losing streak on the next few bets, and explain why long runs are almost certain over many bets.
      • Calculate the drawdown from a run of losses at a fixed stake and the gain needed to recover from it.
   3. Positions that move together15 min

      Why several trades on related markets are often one bet in disguise, how to see their joint cost, expected value and worst case in a scenario table, and how to size them together.

      Objectives

      • Identify positions that depend on the same underlying outcome and size them as one bet.
      • Calculate the combined cost, expected value and worst case of several positions held together.

   Module check

   10 questions drawn from the module's pool, pass mark 80%. Retake it as often as you like: every retake draws new questions, and you see the answer and explanation for each one.

3. Module 3

   Execution

   Turning a view into a position without giving the edge away: how orders fill, which order type to use, when to sell before resolution, how a hedge locks in a result, and how ladders and multi-outcome markets are priced.

   1. Orders, fills and slippage16 min

      What happens when an order meets the book, how to calculate the price you really get, what the spread and depth look like on real markets, and when a limit order beats a market order.

      Objectives

      • Calculate the average fill price and the slippage of an order that walks the book.
      • Choose between a limit order, a marketable limit order and a market order for a given situation.
   2. Exits and hedges15 min

      When to sell before resolution, why your entry price has nothing to do with it, and how buying the other side locks in a result — plus the partial hedge that removes the downside and keeps some of the upside.

      Objectives

      • Decide between selling a position now and holding it to resolution, using the bid and your current probability.
      • Calculate the result locked in by hedging a position with the opposite side, fully or partly.
   3. Ladders and multi-outcome markets15 min

      How date and threshold ladders must be ordered, what to do when they are not, and how to read the sum of prices in a market where exactly one outcome wins.

      Objectives

      • Check a date or threshold ladder for prices that contradict each other, and build the trade that exploits it.
      • Calculate the overround of a multi-outcome market and the normalised probability of one outcome.

   Module check

   10 questions drawn from the module's pool, pass mark 80%. Retake it as often as you like: every retake draws new questions, and you see the answer and explanation for each one.

4. Module 4

   The other side

   Who you are trading against and what their willingness to trade tells you, how cross-venue arbitrage works and why it so often is not one, what smart-money signals do and do not show, and the rules that protect you from yourself.

   1. Who is on the other side15 min

      Market makers, informed traders, bots, hedgers and people trading for fun: why each is there, what their trade tells you, and why a resting order tends to fill when you would rather it did not.

      Objectives

      • Identify the likely counterparty to a trade and what their willingness to trade suggests.
      • Explain adverse selection and calculate what a filled resting order is worth once it is taken into account.
   2. Cross-venue arbitrage15 min

      Buying Yes on one venue and No on another: the arithmetic of a locked-in result after fees, how to annualise it, and the five ways it turns into a loss.

      Objectives

      • Calculate the locked-in profit of a cross-venue arbitrage after fees, and annualise its return.
      • Identify the risks that can turn a cross-venue arbitrage into a loss.
   3. Smart money and self-discipline16 min

      What following strong wallets can and cannot tell you, and how to check a signal's record against the price; why win rate is the wrong scoreboard; and the rules that keep a trader from turning a bad week into a bad year.

      Objectives

      • Judge whether a smart-money signal adds anything to the market price.
      • Apply rules that stop chasing losses, averaging down without a reason and judging by win rate instead of return.

   Module check

   10 questions drawn from the module's pool, pass mark 80%. Retake it as often as you like: every retake draws new questions, and you see the answer and explanation for each one.