Trader

#Definition

A trader is any individual or entity that participates in prediction markets by buying and selling shares representing future outcomes. Traders range from casual hobbyists to professional forecasters, market makers, and institutional participants, each with different motivations, strategies, and skill levels.

#Types of Traders

#By Information Advantage

Informed Traders

Definition: Possess superior information or analytical ability

Characteristics:

• Deep research and analysis
• Domain expertise (e.g., political analysts, data scientists)
• Proprietary models or data sources
• Quick to act on breaking news
• Consistent profitability

Example:

Political analyst specializing in swing state polling
- Maintains spreadsheet of all polls
- Adjusts for polling bias
- Identifies mispriced markets
- Trades before markets adjust
- Edge: Better information processing

Typical profits: 5-30% annual returns

Uninformed Traders (Noise Traders)

Definition: Trade without informational edge

Characteristics:

• Recreational trading
• Emotional decisions (FOMO, panic)
• Following trends without analysis
• Overconfidence in gut feelings
• Often unprofitable long-term

Example:

Casual bettor on sports markets
- Bets on favorite team (bias)
- Doesn't research statistics
- Trades based on excitement
- Makes impulsive decisions
- Result: Loses money over time

Typical profits: -5% to -20% annual (losses)

#By Role

Market Makers

Definition: Provide liquidity by quoting both bid and ask

Characteristics:

• Post orders on both sides
• Earn bid-ask spread
• Capital intensive
• Low risk tolerance (hedge positions)
• High volume, thin margins

Example:

Professional market maker
Quotes:
- Buy YES @ 59¢ (bid)
- Sell YES @ 61¢ (ask)
Spread: 2¢

When both orders fill:
- Bought @ 59¢
- Sold @ 61¢
- Profit: 2¢ per share

Volume: 10,000 shares/day
Daily profit: $200
Annual: $50,000+ (on one market)

Speculators

Definition: Take directional bets on outcomes

Characteristics:

• Profit from price movements
• High risk tolerance
• Conviction-based trading
• May hold to resolution
• Win big or lose big

Example:

Speculator on election market
View: "Trump will win"
Action: Buy YES @ 45¢
Size: $5,000 (111 contracts)
Hold: Until resolution

Outcome if correct:
- Receives: $11,100
- Profit: $6,100 (122% return)

Outcome if wrong:
- Receives: $0
- Loss: $5,000 (100% loss)

Hedgers

Definition: Trade to reduce risk from real-world exposure

Characteristics:

• Not seeking profit from markets
• Protecting against outcomes
• Willing to pay premium for insurance
• Business or personal risk management
• Often provide liquidity to speculators

Example:

Solar panel company
Risk: Government might cut solar subsidies
Hedge: Buy NO on "Will subsidies be extended?"

Scenario 1: Subsidies cut
- Business loses: $1,000,000
- Market pays: $500,000
- Net loss: $500,000 (hedged)

Scenario 2: Subsidies extended
- Business gains: $0 (status quo)
- Market costs: $200,000 (premium paid)
- Net: -$200,000 (insurance cost)

Result: Reduced volatility, capped downside

Arbitrageurs

Definition: Exploit price discrepancies across markets

Characteristics:

• Monitor multiple platforms
• Fast execution
• Low risk (simultaneous trades)
• Thin margins, high volume
• Improve market efficiency

Example:

Arbitrage trader finds:
- Polymarket: Trump YES @ 52¢
- Kalshi: Trump YES @ 54¢
- Opportunity: 2¢ spread

Action:
1. Buy 1,000 YES on Polymarket @ 52¢ = $520
2. Sell 1,000 YES on Kalshi @ 54¢ = $540
3. Net profit: $20 (3.8% instant return)

Scale: 100+ trades per day
Result: Low risk, consistent profits

#By Experience Level

Retail Traders

Definition: Individual traders with personal capital

Characteristics:

• Small account sizes ($100 - $10,000)
• Part-time trading
• Limited resources
• Higher transaction costs (%)
• Learning curve

Advantages:

• Nimble (can move quickly)
• Niche expertise possible
• No organizational constraints
• Keep all profits

Disadvantages:

• Limited capital
• Higher relative fees
• No proprietary tools
• Time constraints

Professional Traders

Definition: Full-time, experienced market participants

Characteristics:

• Large capital ($100,000+)
• Trading as primary income
• Sophisticated tools and models
• Lower transaction costs
• Proven track record

Example:

Professional prediction market trader
Capital: $500,000
Strategy: Statistical arbitrage + informed trading
Tools: Custom scraping, alerts, models
Hours: 40-60 hours/week
Returns: 15-25% annually
Income: $75,000 - $125,000/year

Institutional Traders

Definition: Firms or organizations trading at scale

Characteristics:

• Very large capital (millions)
• Teams of analysts
• Proprietary technology
• Regulatory compliance
• Market moving size

Example:

Hedge fund trading prediction markets
Capital: $10,000,000 allocated
Team: 5 analysts, 2 traders, 1 quant
Focus: Political and economic markets
Edge: Proprietary polling, models
Goal: Hedging portfolio risk + alpha

#Trader Psychology

#Cognitive Biases

Overconfidence Bias

Problem: Overestimating accuracy of predictions

Trader believes: 90% confidence YES wins
True probability: 60%
Result: Overbets, loses money when wrong

Solution: Track calibration, adjust confidence

Confirmation Bias

Problem: Seeking information that confirms beliefs

Trader long YES at 60¢
Ignores negative news
Focuses on positive news
Price drops to 40¢
Holds losing position

Solution: Devil's advocate analysis, pre-mortems

Recency Bias

Problem: Over-weighting recent events

Last 3 trades: All winners
Trader thinks: "I'm on a hot streak"
Reality: Sample size too small, luck
Result: Overconfident next trades

Solution: Long-term tracking, statistical thinking

Loss Aversion

Problem: Feeling losses more than equivalent gains

Two scenarios:
A: Guaranteed $50 profit
B: 50% chance $100 profit, 50% break even

Most choose A (due to loss aversion)
But B has higher expected value

Solution: Focus on expected value, not emotions

#Emotional Control

Fear:

• Symptom: Paralysis, missing opportunities
• Cause: Fear of losing money
• Solution: Proper position sizing, accept losses as cost

Greed:

• Symptom: Overleveraging, chasing
• Cause: Wanting maximum profits
• Solution: Predefined targets, discipline

FOMO (Fear of Missing Out):

• Symptom: Jumping into moves after they happen
• Cause: Seeing others profit
• Solution: Wait for setup, stick to plan

Revenge trading:

• Symptom: Impulsive trades after losses
• Cause: Trying to "get even"
• Solution: Take break, review strategy

#Trader Skills

#Essential Skills

1. Research & Analysis

Quantitative analysis:

• Statistical modeling
• Data collection and processing
• Probability and expected value
• Backtesting strategies

Qualitative analysis:

• Event understanding
• News interpretation
• Market sentiment reading
• Rule interpretation

2. Risk Management

Position sizing:

Kelly Criterion example:
Edge: 10% (market at 50¢, true prob 60%)
Kelly bet: 10% of bankroll

With $1,000 bankroll:
Bet size: $100 (conservative)
Never bet entire bankroll

Diversification:

Don't: Put $1,000 in one market
Do: Spread across 5-10 markets
Result: Reduced volatility, smoother returns

Stop losses:

Entry: 60¢
Stop: 50¢
Max loss: 16.7% on position
Protects against total wipeout

3. Technical Execution

Order types:

• When to use market vs. limit
• Managing slippage
• Timing entries and exits
• Platform mechanics

Tools:

• Price alerts
• Portfolio tracking
• News feeds
• Custom scripts/bots

4. Psychology & Discipline

Process over outcome:

Good process, bad outcome = Unlucky
Bad process, good outcome = Lucky
Focus on making +EV decisions consistently

Emotional regulation:

• Recognize tilt (emotional trading)
• Take breaks after losses
• Stick to strategy
• Accept variance

#Advanced Skills

Market Making

Spread management:

Market price: 55¢
Your spread:
- Bid: 54¢ (buy)
- Ask: 56¢ (sell)

Adjust based on:
- Volatility (wider if volatile)
- Inventory (adjust if too long/short)
- Competition (tighten if others closer)

Statistical Arbitrage

Finding edges:

Compare:
- Current market price: 60¢
- Your model output: 70¢
- Edge: 10¢ (potential profit)
- Action: Buy if confidence high

Event Trading

News-based trading:

Event: Major poll drops
Reaction: Market moves 50¢ → 60¢ in 2 minutes
Decision: Too fast? Already priced in? Overreaction?
Action: If overreaction, fade the move

#How to Become a Trader

#Getting Started

1. Education (1-3 months):

• Read about prediction markets
• Understand probability and expected value
• Study market mechanics
• Learn from experienced traders

2. Paper Trading (1-2 months):

• Use play-money platforms (Manifold)
• Test strategies without risk
• Track hypothetical performance
• Build confidence

3. Small Real Money (3-6 months):

• Start with $100-500
• Trade smallest sizes
• Focus on learning, not profit
• Make inevitable mistakes cheaply

4. Gradual Scale (6+ months):

• Increase size slowly
• Track everything
• Refine strategy
• Build bankroll

#Capital Requirements

Minimum to start: $100-500

• Learn the basics
• Make mistakes without major damage
• Enough for meaningful positions

Comfortable amount: $1,000-5,000

• Diversify across markets
• Weather variance
• Psychological comfort

Professional level: $50,000+

• Make meaningful income
• Absorb drawdowns
• Take larger opportunities

#Time Commitment

Casual trader: 5-10 hours/week

• Part-time hobby
• Extra income
• Learn and enjoy

Serious trader: 20-40 hours/week

• Side hustle or semi-pro
• Significant income potential
• Deep commitment

Professional trader: 40-60+ hours/week

• Full-time career
• Primary income source
• Constant learning and adaptation

#Trader Performance Metrics

#Key Metrics

Return on Investment (ROI):

Total profit: $500
Total invested: $2,000
ROI: 25%

Compare to:
- S&P 500: ~10% annually
- T-bills: ~5% annually
Goal: Beat alternatives

Win Rate:

Trades: 100
Wins: 60
Win rate: 60%

Note: Win rate alone misleading
60% win rate with small wins < 40% win rate with huge wins

Profit Factor:

Gross profit: $1,000
Gross losses: $600
Profit factor: 1.67

>1.0 = Profitable
>1.5 = Good
>2.0 = Excellent

Sharpe Ratio:

Average return: 15%
Risk-free rate: 5%
Standard deviation: 20%
Sharpe: (15-5)/20 = 0.5

>0.5 = Acceptable
>1.0 = Good
>2.0 = Excellent

Maximum Drawdown:

Peak: $10,000
Trough: $7,000
Max drawdown: 30%

Important: Can you psychologically handle?

#Tracking Performance

Trade journal:

Date | Market | Side | Entry | Exit | P/L | Notes
-----|--------|------|-------|------|-----|------
11/24| BTC100k| Long | 60¢   | 70¢  | +$10| News catalyst
11/25| ElecUSA| Long | 55¢   | 50¢  | -$5 | Poll surprise
...

Periodic reviews:

• Weekly: Review open positions
• Monthly: Analyze performance metrics
• Quarterly: Evaluate strategy effectiveness
• Annually: Set goals and adjust approach

#Platform Differences for Traders

#Kalshi (Regulated)

Best for:

• Professional traders
• Tax reporting (W-9, 1099s)
• High liquidity needs
• Order book sophistication

Considerations:

• Higher fees (maker/taker)
• KYC required
• US only
• Regulated market selection

#Polymarket (Crypto)

Best for:

• 24/7 traders
• Crypto-native users
• International participants
• High-volume markets

Considerations:

• Need crypto wallet
• Gas fees (minimal)
• No formal tax reporting
• More market variety

#Manifold Markets (Play Money)

Best for:

• Learning traders
• Testing strategies
• Fun/social trading
• Experimental markets

Considerations:

• Not real money
• Less serious competition
• Great for practice
• No financial risk

#Successful Trader Characteristics

Common traits of profitable traders:

✅ Discipline: Stick to strategy, avoid tilt ✅ Patience: Wait for opportunities ✅ Humility: Accept mistakes, learn constantly ✅ Analytical: Data-driven decisions ✅ Risk-aware: Proper position sizing ✅ Adaptable: Adjust to changing markets ✅ Realistic: Reasonable expectations ✅ Persistent: Long-term commitment

#Common Trader Mistakes

❌ Overtrading: Too many positions, fees eat profits ❌ Under-researched: Trading without understanding ❌ Poor sizing: Betting too much or too little ❌ No plan: Random, emotional decisions ❌ Ignoring fees: Small profits disappear ❌ Chasing: Buying after big moves ❌ Holding losers: Not cutting losses ❌ No tracking: Can't improve without data

#The Evolution of a Trader

#Stage 1: Beginner (0-6 months)

• Learning basics
• Making mistakes
• Usually losing money
• Building foundation

#Stage 2: Developing (6-18 months)

• Understanding probability
• Testing strategies
• Inconsistent results
• Finding edge

#Stage 3: Competent (18-36 months)

• Consistent small profits
• Defined strategy
• Proper risk management
• Refined process

#Stage 4: Professional (3+ years)

• Regular profitability
• Multiple strategies
• Scaled capital
• Teaching others

#The Role of Traders

Traders serve essential functions in prediction markets:

✅ Price discovery: Incorporate information into prices ✅ Liquidity provision: Enable others to trade ✅ Information aggregation: Collective wisdom emerges ✅ Efficiency: Correct mispricings quickly ✅ Volume: Keep markets active and relevant

Without active traders, prediction markets would be illiquid, inefficient, and unable to serve their purpose of aggregating information and forecasting outcomes.

Good traders make markets work.