#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 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
#Trade Lifecycle Visual
#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.