Prediction Market Risk Management

Essential risk management strategies for prediction market trading. Learn position sizing, stop losses, and portfolio diversification.

Why Risk Management Matters

Even with an edge, poor risk management can lead to ruin. Prediction markets are inherently uncertain - you can be right about probability and still lose money. Proper risk management ensures you survive losing streaks and compound gains over time.

Position Sizing: The Kelly Criterion

The Kelly Criterion optimizes bet sizing based on your edge and odds.

f* = (p × b - q) / b

Where: f* = fraction of bankroll, p = win probability, q = loss probability, b = odds

  • Full Kelly is aggressive - Consider using half or quarter Kelly
  • Never bet more than Kelly suggests - Overbetting is the #1 mistake
  • Be conservative with edge estimates - Your edge is probably smaller than you think

Bankroll Management

  • Only trade with money you can afford to lose - This is gambling, not investing
  • Set a maximum position size - Never more than 5-10% on a single market
  • Track your results - Know your win rate and average returns
  • Withdraw profits periodically - Lock in gains, reduce temptation to overtrade

Diversification

  • Spread across markets - Don't put everything in one event
  • Avoid correlated positions - Multiple political markets may move together
  • Use different timeframes - Mix short and long-term positions
  • Consider different platforms - Reduce platform-specific risks

Risk Types to Manage

Market risk: Your prediction is wrong

Liquidity risk: Can't exit position at desired price

Platform risk: Exchange hack, withdrawal issues, or shutdown

Resolution risk: Disputed or unclear outcome determination

Regulatory risk: Legal changes affecting access or profits

Stop Losses & Exit Rules

  • Set exit points before entering - Know when you'll cut losses
  • Consider time-based exits - Exit if thesis isn't playing out
  • Take partial profits - Scale out as positions move in your favor
  • Don't move your stop loss - Stick to your original plan

Common Mistakes

  • Martingale betting - Doubling down after losses is a path to ruin
  • Chasing losses - Taking bigger risks to recover quickly
  • Overconfidence - Thinking you can't lose
  • Ignoring correlation - Multiple "diversified" bets that are actually correlated
  • All-in bets - Even 90% favorites lose sometimes

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