Strategy & Analysis Glossary

Arbitrage

Arbitrage in prediction markets is the practice of exploiting price discrepancies for the same event across different platforms or outcomes to lock in a guaranteed profit regardless of how the event resolves.

Bankroll Management

Bankroll management is the set of rules a prediction market trader uses to allocate capital across positions, limiting per-trade exposure and total risk so that a losing streak does not result in ruin before long-run edge can play out.

Edge

Edge is the measurable advantage a trader holds over the market price of a contract, arising when an independent probability estimate differs favorably from the [[implied-probability]] reflected in the current price.

Expected Value

Expected value (EV) is the probability-weighted average outcome of a trade, calculated by multiplying each possible payout by its estimated probability and summing the results. A positive EV trade is one where the anticipated return exceeds the cost over the long run.

Hedging

Hedging in prediction markets is the act of taking an opposing position to an existing trade in order to reduce or eliminate exposure to a particular outcome, locking in a partial profit or capping potential losses.

Kelly Criterion

The Kelly Criterion is a mathematical formula that determines the optimal fraction of a trading bankroll to stake on a single bet, maximizing long-run wealth growth by sizing positions in proportion to estimated edge.

Longshot Bias

Longshot bias is the systematic tendency for low-probability events to be overpriced in prediction markets and betting exchanges, causing traders who consistently bet on unlikely outcomes to lose more money than the [[vig]] alone would predict.

Market Efficiency

Market efficiency describes the degree to which a prediction market prices fully and accurately reflect all available information, leaving little or no exploitable gap between [[implied-probability]] and true probability.

Mispricing

A mispricing occurs when a prediction market contract price deviates materially from the true probability of the event, creating an opportunity for traders with accurate probability estimates to capture positive [[expected-value]].

Momentum Trading

Momentum trading in prediction markets is a strategy that enters positions in the direction of a recent price trend, betting that newly arriving information or market sentiment will continue to push prices further before reversing.

Sharp Money

Sharp money refers to trades placed by sophisticated, well-informed participants whose positions are considered reliable signals of true probability, as opposed to casual or uninformed participants whose activity is sometimes called recreational or square money.

Value Betting

Value betting is the disciplined practice of placing trades only when your independent probability estimate indicates the contract is underpriced relative to its true likelihood, ensuring every trade has positive [[expected-value]] before execution.