The 10 Prediction Market Commandments

I don’t even have any good skills. You know, like nunchuck skills, bow hunting skills, computer hacking skills. Girls only want boyfriends who have great skills! -Napoleon DynamiteWhile Napoleon Dynamite may have missed the mark on the skills women look for in their boyfriends, he’s right: certain skills do make you more attractive. Dancing, playing a musical instrument, active listening, having a good sense of humor, and being well-dressed are all great skills to have if you’re looking to attract a partner. But I’m not here to give dating advice, I’m here to give prediction market advice. What are the skills that will make you money in prediction markets? I’m going to give you a brief overview of 10 skills that I think are important for prediction market traders.

Although the name “prediction markets” suggests you have to be good at “prediction”, you can make a ton of money just by reacting to news faster than everyone else. There are two different types of news that you can make money off:

Speed is an easy way to win money in prediction markets without even needing to predict anything, but how do you consistently see the news first? Although sometimes you’ll get lucky and will be looking at Twitter right when some news drops, a better way to outrace other traders is to set up alerts that are specific to each market. www.tweetdeck.com is a key tool for this. Tweetdeck allows you to set up alerts for specific search terms. The key is to pick search terms that will catch breaking news without overwhelming you with other tweets. I will usually set broad search terms first and then will see how many false negatives I am getting. For example, I currently have an alert set for “Student Loan Payments.” This term is broad enough to capture any news that would report on an extension of the pause and is only getting around 20 false positives a day.

If you are getting too many false positives, you can limit the alerts only to verified users. If you are still getting too many, you will need to narrow the search, for example, “Student Loan Payments Pause Extended.” The narrower you search, the more likely you are to miss the tweet that first breaks the news, so you must find a balance.

Contrary to what Twitter and comments sections tell you, nobody knows everything about every topic. If you want to play a variety of markets, you must be able to research topics that you don’t know about. Fortunately, most of the research that you will need can be done via Google. For legislation, you can find summaries and lists of cosponsors for bills as well as a complete voting history for the House and Senate. It’s often useful to filter the results by “News” and apply different date ranges so you can find news articles that were written at the time of the events (for example, past Supreme Court confirmations.)

Surprisingly, some of my biggest wins have come from having a strong understanding of the key concepts around negotiations. I find that understanding negotiations is the key to winning markets on legislation. The primary concept I focus on is to determine the best alternative to a negotiated agreement (BATNA.) If you look at the different players in the negotiation and determine what happens to their interests if no negotiation is reached, it gives you a lens to analyze possible outcomes. For example, in the debt ceiling negotiations, both sides wanted the same thing: to raise or suspend the debt ceiling. Once you recognize that neither side had a good alternative to a negotiated agreement, it was clear that they would reach an agreement before the deadline.Another recent example is the Build Back Better Act. In this example, Joe Manchin’s BATNA was to do nothing. The bill was a grab bag of progressive priorities that didn’t have much appeal to a conservative Democrat like Manchin, so his best alternative was to just not pass anything. In watching those negotiations, once it became clear that Manchin’s demands weren’t being met, it was obvious that he would eventually just give up on the negotiations. Had the progressive Democrats recognized that Manchin always had the leverage, they would have given in more and likely would have been able to pass something rather than overplaying their hand and getting nothing.

One last note on negotiations, an upcoming House or Senate recess can be a key point of leverage. When a leader throws an arbitrary deadline on a bill, it will often get blown through. But if a leader states that they won’t recess until the bill is passed, that is often an effective deadline. Congresspeople enjoy their time off as much as, if not more so than, anyone.

Programming skills can give you an edge over other traders in several ways. The first is to program bots to interact directly with Kalshi through its API. Bots can give you a speed advantage that can’t be matched by a trader manually entering trades. Another way to use programming to make money is using web scrapers. Web scrapers can alert you when a website changes or can be used to scrape all the historic data from a website. If you don’t have programming skills (like me), try to partner with someone who does.

Many markets can be tackled via data analysis and modeling. Because many of the recurring markets are based on data (Covid cases, TSA checkpoints, NYC subway riders, etc.), creating reliable data models can be extremely profitable. Most of my models have been fairly simple regressions, but there are traders who specialize in data analysis that have created more complex models that are used to predict election results, covid cases, vaccinations, TSA checkpoints, and even the weather.

Another important skill is brainstorming. When I feel certain that a market will resolve one way, I try to brainstorm all the ways I can imagine myself losing that market and then will assign odds to each of those outcomes. This helps me to avoid becoming overconfident in a position. Often when I take a loss, it was because I wasn’t thorough enough in brainstorming possible outcomes.

For my first five years of political trading, I worked completely on my own. I didn’t use Discord or any of the comment boards and I did fairly well. But in the past year and a half I’ve started to bounce my ideas off other great traders and since then I’ve had by far my best year ever. Working with other people can help you fill in gaps in the skills on this list, as well as open your eyes to points of view that you haven’t considered. Try to find a group of trustworthy friends to exchange ideas with. It’s far better than trying to figure it all out on your own. If you’re interested in exploring more of the community, here is a link to the Kalshi Discord.

You’re monitoring your positions and suddenly the balance drops. You identify the market that has plunged but can’t find any reason why it did. Is it insiders? Should you sell? Probably not. Because a single trader can easily change the price of a position, especially in low liquidity markets, it’s important not to panic sell without a good reason to do so. There’s no worse feeling than watching the price of your position drop, selling your position to avoid further losses, and then watching the price promptly bounce back.

The last skill I’ll cover applies to all the prior skills: creativity. If you want to consistently beat the market, you must approach the market with creativity. For example, when creating alerts, don’t just create alerts for the outcome. Create alerts for potential news. For the Federal Reserve interest rate markets, create alerts for each of the members of the Federal Open Market Committee, knowing that quotes from them will move the markets. For each market, think of different ways to approach it. For the Billboard Hot 100 market, look at other sources of music metrics to find correlations. When creating a data model, be creative about independent variables you can consider. And when brainstorming possible outcomes, be creative in coming up with as many possible outcomes as possible, no matter how absurd.

The goal of this article is to provide you with an overview of the skills that I think are important for prediction market trading. Few will be an expert in all of them nor do you need to be profitable. You can specialize in a few of them and focus on the markets that best use those skills or try to be well-rounded across many or all of them so you can trade in more markets. Whichever approach you choose, good luck in your trades!

Gaeten

All examples in this article are hypothetical interpretations of situations and are used for explanation purposes only. The views in this article reflect solely those of the author and not those of Kalshi or its affiliated institutions. This article and the information herein should not be considered investment advice or the results of actual market experience