Trade

#Definition

A trade is the execution of a buy or sell order in a prediction market, where a trader exchanges capital (typically dollars or stablecoins) for shares representing a position on a future outcome. Each trade involves two parties: a buyer and a seller, with prices determined by supply, demand, and perceived probability of outcomes.

#Anatomy of a Trade

#Basic Components

What's exchanged:

• Buyer gives: Money (e.g., 60¢)
• Buyer receives: 1 share (YES or NO)
• Seller gives: 1 share
• Seller receives: Money (e.g., 60¢)

Key information:

• Market/event
• Outcome (YES or NO)
• Quantity (number of shares)
• Price per share
• Total cost
• Timestamp
• Order type

#Trade Example

Market: "Will Bitcoin reach $100k in 2025?"
Trade executed:
- Trader A buys: 100 YES shares
- Price: 60¢ per share
- Total cost: $60
- Seller: Trader B (or AMM pool)
- Timestamp: 2024-11-24 14:32:15 UTC
- Platform: Polymarket

What this means:

• Trader A paid $60 for position worth $100 if BTC hits $100k
• Potential profit: $40 (67% return)
• Potential loss: $60 (100% loss)
• Break-even: Needs >60% probability to be +EV

#Types of Trades

#By Order Type

Market Order Trade

Definition: Immediate execution at best available price

Action: Buy 50 YES shares (market order)
Order book shows:
- 30 shares @ 62¢
- 40 shares @ 63¢
Execution:
- 30 shares bought @ 62¢ = $18.60
- 20 shares bought @ 63¢ = $12.60
Total: 50 shares for $31.20 (average 62.4¢)

Characteristics:

• Instant execution
• Price varies (takes best available)
• May cause slippage on large orders
• Certainty of fill, uncertainty of price

Limit Order Trade

Definition: Execution only at specified price or better

Action: Buy 50 YES shares @ 60¢ (limit order)
Scenarios:
1. Order book has 50+ shares @ ≤60¢
   → Fills immediately at 60¢ or better
2. Order book lacks sufficient shares @ ≤60¢
   → Order sits in book, waits for sellers
3. Price never reaches 60¢
   → Order never fills

Characteristics:

• Price certainty
• May not fill (execution risk)
• Can wait hours/days/never
• Control over execution price

#By Direction

Buy Trade (Long)

Taking a position that outcome will occur:

YES trade:

Buy 100 YES @ 55¢ = $55 cost
If YES wins → Receive $100 → Profit: $45
If NO wins → Receive $0 → Loss: $55

NO trade:

Buy 100 NO @ 30¢ = $30 cost
If NO wins → Receive $100 → Profit: $70
If YES wins → Receive $0 → Loss: $30

Sell Trade (Close/Short)

Exiting or taking opposite position:

Sell YES shares (closing long or shorting):

Previously bought: 100 YES @ 55¢
Now sell: 100 YES @ 65¢
Proceeds: $65
Profit: $65 - $55 = $10 (18% return)

Sell NO shares:

Previously bought: 100 NO @ 30¢
Now sell: 100 NO @ 25¢
Proceeds: $25
Loss: $25 - $30 = -$5 (17% loss)

#By Strategy

Directional Trade

Betting on specific outcome:

Belief: Bitcoin will likely hit $100k
Action: Buy YES @ 60¢
Goal: Price appreciation or hold to resolution

Arbitrage Trade

Exploiting price differences:

Polymarket: YES @ 58¢
Kalshi: YES @ 62¢
Action:
1. Buy YES on Polymarket @ 58¢
2. Sell YES on Kalshi @ 62¢
Profit: 4¢ per share (7% return, instant)

Swing Trade

Trading price fluctuations:

Day 1: Buy YES @ 50¢
Day 5: Sell YES @ 60¢ (+10¢)
Day 8: Buy YES @ 55¢
Day 12: Sell YES @ 65¢ (+10¢)
Total: 20¢ profit on volatility

Market Making Trade

Providing liquidity on both sides:

Post orders:
- Buy YES @ 59¢ (bid)
- Sell YES @ 61¢ (ask)
When both fill:
- Bought @ 59¢, sold @ 61¢
- Profit: 2¢ per share (spread capture)

#Trade Execution

#On Order Book Markets

Matching process:

Order book (before):
Asks (sell orders):
  100 shares @ 63¢
  50 shares @ 62¢
Bids (buy orders):
  75 shares @ 60¢
  120 shares @ 59¢

New trade: Buy 100 shares (market order)

Execution:
1. Takes 50 shares @ 62¢ = $31.00
2. Takes 50 shares @ 63¢ = $31.50
Total: 100 shares for $62.50 (avg 62.5¢)

Order book (after):
Asks:
  50 shares @ 63¢
Bids:
  75 shares @ 60¢
  120 shares @ 59¢

#On AMM Markets

AMM execution:

Pool state:
- YES tokens: 10,000
- NO tokens: 10,000
- Price: 50¢ (balanced pool)

Trade: Buy 500 YES
AMM calculates:
- New price after trade: ~52.4¢
- Average execution price: ~51.2¢
- Cost: $256
- Slippage: 1.2¢ (2.4%)

Pool state after:
- YES tokens: 9,500
- NO tokens: 10,256
- New price: 52.4¢

#Trade Costs

#Direct Costs

Trading fees:

• Kalshi: ~2-7% of profit (maker/taker)
• Polymarket: ~2% fee (built into spread)
• PredictIt: 5% on profits + 10% on withdrawals
• Manifold: Free (play money)

Gas fees (blockchain platforms):

• Polymarket on Polygon: $0.01-0.10 per trade
• Augur on Ethereum: $5-50 per trade (variable)

Spread cost (implicit):

Market price: 60¢
Bid: 59¢ / Ask: 61¢
Spread: 2¢

Round-trip cost:
- Buy @ 61¢ (market order)
- Sell @ 59¢ (market order)
- Total cost: 2¢ = 3.3% round-trip

#Opportunity Costs

Capital lockup:

Buy 100 shares @ 60¢ = $60 locked
Market doesn't resolve for 3 months
Opportunity cost: Could have earned 5% in T-bills
Lost interest: $60 × 5% × 3/12 = $0.75

Slippage (large orders):

Small order: 10 shares @ 60¢ = $6.00 (60¢ avg)
Large order: 1000 shares = $650 (65¢ avg)
Slippage cost: 5¢ per share = $50 extra cost

#Trade Timing

#Optimal Trade Entry

Early in market lifecycle:

Pros:
✅ Wider mispricing opportunities
✅ More time for information gathering
✅ Lower prices (less certainty)

Cons:
❌ Capital locked longer
❌ More uncertainty
❌ Events may change

Late in market lifecycle:

Pros:
✅ More information available
✅ Outcome becoming clearer
✅ Quick resolution

Cons:
❌ Smaller profit margins
❌ Prices already efficient
❌ FOMO risk

#Optimal Trade Exit

Profit-taking levels:

Entry: 40¢
Targets:
- Conservative: 50¢ (+25% profit)
- Moderate: 60¢ (+50% profit)
- Aggressive: 75¢ (+87.5% profit)
- Hold to close: 100¢ (+150% profit)

Risk: Higher target = more risk of reversal

Stop-loss levels:

Entry: 60¢
Stop losses:
- Tight: 55¢ (-8.3% max loss)
- Standard: 50¢ (-16.7% max loss)
- Wide: 40¢ (-33% max loss)

Protection from total loss

#Trade Psychology

#Common Trading Emotions

FOMO (Fear of Missing Out):

Scenario: Price jumping from 50¢ → 70¢ rapidly
Emotion: "I need to get in before it goes higher!"
Risk: Buying at top, reversals common
Better: Wait for pullback or skip

Panic Selling:

Scenario: Price drops from 65¢ → 50¢
Emotion: "I need to get out before it goes to zero!"
Risk: Selling at bottom, missing recovery
Better: Review thesis, decide rationally

Overconfidence:

Scenario: Won last 5 trades
Emotion: "I can't lose, going all-in"
Risk: Overleveraging, single bad trade wipes account
Better: Consistent position sizing

Revenge Trading:

Scenario: Lost $100 on bad trade
Emotion: "Need to win it back immediately"
Risk: Poor decisions, doubling down on mistakes
Better: Take break, stick to strategy

#Trade Patterns

#Volume Patterns

Low volume:

Typical: <$1,000 daily volume
Characteristics:
- Wide spreads
- High slippage
- Stale prices
- Limited liquidity

High volume:

Typical: >$100,000 daily volume
Characteristics:
- Tight spreads
- Low slippage
- Responsive prices
- Deep liquidity

#Price Patterns

Trending:

Steady movement in one direction
50¢ → 55¢ → 60¢ → 65¢ → 70¢
Strategy: Follow the trend

Mean-reverting:

Oscillating around average
55¢ → 60¢ → 55¢ → 50¢ → 55¢
Strategy: Fade extremes

Volatile:

Large swings frequently
50¢ → 70¢ → 45¢ → 65¢ → 50¢
Strategy: Swing trading or avoid

#Trade Recording

#Why Track Trades

✅ Tax reporting (required for real money) ✅ Performance analysis (improve over time) ✅ Strategy evaluation (what works?) ✅ Psychological insights (avoid patterns) ✅ Accountability (honest assessment)

#Trade Journal Template

Date: 2024-11-24
Market: "Will Bitcoin reach $100k in 2025?"
Platform: Polymarket
Side: Long YES
Entry: 60¢ × 100 shares = $60
Reasoning: Strong momentum, institutional adoption
Confidence: 7/10
Exit: TBD
Profit/Loss: TBD
Notes: Stop loss at 50¢

#Platform Differences

#Kalshi

• Regulated exchange
• Order book model
• Maker/taker fees
• Limit and market orders
• Professional liquidity

#Polymarket

• Crypto-native
• Order book + AMM hybrid
• Gas fees (minimal)
• 24/7 trading
• Deep liquidity on popular markets

#Manifold Markets

• Play money
• AMM model
• Free trading
• Instant execution
• Experimental markets

#Trade Best Practices

#Before Trading

✅ Research: Understand the market and event ✅ Read rules: Know resolution criteria ✅ Check liquidity: Ensure you can enter and exit ✅ Size appropriately: Never risk more than you can lose ✅ Set limits: Define entry, exit, and stop loss

#During Trading

✅ Use limit orders: Control execution price ✅ Start small: Test with smaller size first ✅ Monitor slippage: Watch for execution quality ✅ Stay disciplined: Follow your plan ✅ Manage emotions: Don't chase or panic

#After Trading

✅ Record trade: Log in journal ✅ Monitor position: Track market developments ✅ Review outcomes: Learn from results ✅ Adjust strategy: Improve based on data ✅ Report taxes: Keep compliant

#Common Trade Mistakes

❌ Over-trading: Too many trades, fees eat profits ❌ Position too large: One bad trade = major loss ❌ No stop loss: Riding losses to zero ❌ Chasing: Buying after big moves ❌ Ignoring fees: Small trades = high % cost ❌ Emotional decisions: Trading on feelings not logic ❌ No plan: Random entries and exits ❌ Forgetting taxes: Surprise tax bill

#The Importance of Trading

Trading is the mechanism that makes prediction markets work:

✅ Price discovery: Each trade incorporates information ✅ Liquidity provision: Traders enable others to participate ✅ Information aggregation: Collective wisdom emerges ✅ Risk transfer: Hedgers and speculators exchange risk ✅ Profit potential: Rewards accurate forecasting

Without active trading, markets stagnate and lose their predictive power. Every trade adds information and improves market efficiency.