Risk Management
How to stay in the game long enough to win.
#Plain-English Definition
Risk Management is the set of rules you follow to ensure that no single bad trade wipes you out. It's about survival first, profit second.
In prediction markets, where binary outcomes mean you can lose 100% of your investment in a single event, risk management is even more critical than in stock trading.
#Core Concepts
- Position Sizing: Never bet more than a small percentage of your bankroll on one outcome. (See Kelly Criterion).
- Diversification: Don't put all your eggs in one basket. Bet on different, uncorrelated events (e.g., Sports AND Politics).
- Stop Losses: Have a plan to exit if the trade goes against you.
- Hedging: Betting on the opposite side to lock in profit or reduce exposure.
#The Golden Rule
"Never bet money you can't afford to lose." Prediction markets are volatile. "Sure things" fail all the time (e.g., 99% favorites losing). Good risk management prepares you for the unexpected.
#Key Takeaways
- Amateurs focus on how much they can win. Professionals focus on how much they can lose.
- Consistent small wins + protecting capital > One lucky "All-In" bet.