7 Mistakes New Prediction Market Traders Make
Best practices for prediction market trading
Have you ever wanted to trade on prediction markets but don’t know where to start? Stand, the prediction market copy trading platform, is here to help keep you ahead of the curve! We talked to traders and compiled the most common mistakes traders make when they first start trading prediction markets.
Set a strategy
Stay informed!
Don’t go out of your swim lane
Read the rules!
Avoid market orders on illiquid markets
Do not wait for a market to resolve to exit
Do not discount the time value of money
Here they are!
Set a strategy
The worst mistake you can make is trading on vibes. Sure, you may win a few wagers, but sooner or later the markets will wreck you. What do you do? You should come with a sound strategy of how you plan to win. This can either be crafting your own thesis after you have done your own research (#DYOR) or you can copy trade the experts. We wrote a whole blog post about the merits around copy trading here.
No strategy is fool proof, which is why you have to…Stay informed!
Prediction markets react fast. You can assume the sharp traders are watching every new headline attentively. Some traders have bots set up to trigger trades around certain market conditions. Never take any market as a given as the world is a fast moving place.
Example: You have a wager on Jannik Sinner winning Wimbledon. Sinner goes down two sets against Grigor Dimitrov in the Fourth Round. The prediction markets have Dimitrov over 80% likely to win. Then, suddenly, Dimitrov pulls out of the match due to injury. If this sounds far-fetched, it’s actually not. The Sinner futures markets yo-yo’ed around this sequence of events earlier this summer. Stay on guard, stay informed.
Using tools like Stand help notify you ASAP when there’s a change to a market.Don’t go out of your swim lane
Too many traders have been fooled by their own track record, thinking it will naturally translate into success in other categories. Unless you really are a polymath or born with a horseshoe up your you-know-what, you will not consistently succeed in a market you do not understand. Being a successful US election trader has no real advantage in the sports markets and vice versa. You have to know each domain by their own merits.
This trap hurts traders intra-domain too. You may know everything under the Sun about the US Presidential election. How does any of that knowledge translate into who will win the Polish Presidential Election? Do you know anything about the Polish presidential candidates? Do you know what the crucial issues are for the Polish electorate? Do you know how their election process is held? You can certainly take the time to research all these variables. You should assume in good faith that other traders will and have too. Be on guard.
Stand helps you here sorting markets into categories. If you only know the crypto prediction markets, you can organize your Stand trade feeds to show only crypto prediction markets.
Category Filters on Stand.trade Read the rules!
Prediction markets have a relatively straight forward structure: someone makes a prediction around a particular topic. They set a deadline when the market has to resolve by…AND they set the terms. For some markets, like sports markets, it’s fairly straight forward. This event will take place at the set time and will be settled by the team who scores the most. However, in more ambiguous markets, you have to know what you are getting yourself into. One of Polymarket’s most controversial (and highest traded) markets was the infamous Zelenskyy suit market. What constitutes a suit? How will you know if Zelenskyy wears one? What may seem like fairly straightforward conditions can turn gnarly very quickly. Always, always, always read the rules.
WTF is a ‘suit’ here? Avoid market orders on illiquid markets
We. Cannot. Stress. This. Enough.
Market orders are fantastic when you have a liquid, or heavily traded, market with a deep order book. The conditions have to be ideal for you to pull the trigger. If not, you will lose money.
Ex: You put in a market order to buy $100 on “Yes” for “Will Zelenskyy wear a suit before July?
Polymarket will instantly fill that order at the lowest price available. In illiquid markets, this is unlikely to be a fair price, which means you are paying more than it’s worth. You could be paying $0.50 per share instead of a fair value at $0.10. Using limit orders gives you more control by dictating what price you want your order filled.
Prediction markets are still immature markets in a lot of ways.Do not wait for a market to resolve to exit
This is a painful lesson that many first-time traders learn the hard way. Why? Because prediction markets are not perfect. They are representations of sentiment. And, sometimes, they do not resolve neatly. In Polymarket, all rulings can be disputed.
Enough ink has been spilled on the issues around UMA.
The bad news is there is no way to know in advance which market this will happen to.
The good news is you can actually make a fair amount of money from a market that is at 90%. The beauty of prediction markets if you can leave at any time…provided there’s a buyer for your position. That’s why it is critical to check the liquidity, i.e. how deep the order book is, in a given market. Stand lets you set and change limit orders with ease in our market trading interface.
Do not discount the time value of money
New traders often underestimate the time value of money. What does that mean in prediction markets? A market that resolves in a week versus one that resolves in three months might have the same expected payout, but the opportunity cost of tying up capital for longer can eat into your potential returns! Remember to consider not just whether a market is mispriced, but how long your money will be locked up and what else you could be doing with it. You never want to overcommit to long-term markets that deliver lower effective returns than shorter, more liquid opportunities!
Polymarket has done a good job of addressing this by offering holding rewards. They reward long-term pricing by passing a 4.00% annualized Holding Reward in certain markets. You can read more about it here.
In Closing,
Knowledge is learning from your mistakes. Wisdom is learning from others’ mistakes. By now, you should know the 7 common mistakes all new prediction market traders make. That doesn’t mean you won’t make them! Be on guard. And have fun. Like all things in life, there is a learning curve with prediction markets.
Are there other mistakes you think we missed? Please let us know by joining the Stand Discord.
Stand is free to use and helps traders of all expertise. Start trading on Stand today!