Guide to Prediction Market Analysis
Master the fundamentals of analyzing prediction markets and identifying value opportunities.
Understanding Prediction Markets
Prediction markets like Polymarket allow traders to buy and sell shares in the outcomes of future events. Each share pays out $1 if the event occurs and $0 if it doesn't. The current price of a share represents the market's implied probability of that outcome.
Example:
If "Will it rain tomorrow?" YES shares trade at $0.65, the market implies a 65% probability of rain. If you believe the true probability is 80%, buying at $0.65 offers positive expected value.
Edge Calculation
"Edge" is the difference between your estimated probability and the market price. Positive edge means you believe something is more likely than the market suggests.
Positive Edge (Good)
Market price: 40% | Your estimate: 60% | Edge: +20%
→ Consider buying YES shares
Negative Edge (Avoid)
Market price: 70% | Your estimate: 50% | Edge: -20%
→ Consider buying NO shares (or avoid)
Key Metrics to Analyze
- Trading Volume
Higher volume indicates more interest and typically tighter spreads. Low volume markets may have stale prices.
- Liquidity
Deep liquidity means you can enter/exit positions without moving the price significantly.
- Time to Resolution
Markets closer to resolution have less uncertainty and typically tighter ranges.
- Price History
How has the price moved? Sudden moves may indicate new information or whale activity.
Finding Value Bets
A "value bet" occurs when the market price doesn't reflect the true probability. Here's how to identify them:
1. Information Advantage
Do you have knowledge or analysis that the market hasn't priced in? Expert knowledge in a specific domain can provide edge.
2. Market Inefficiencies
New markets, low liquidity situations, or complex multi-outcome markets often have pricing errors.
3. Overreaction to News
Markets sometimes overreact to breaking news. If you can assess the true impact better than the crowd, there's opportunity.
4. Correlated Markets
Related markets should have consistent probabilities. If they don't, one may be mispriced.
Risk Management
Essential Rules
- • Never bet more than you can afford to lose
- • Diversify across multiple markets
- • Size positions based on edge and confidence
- • Keep track of your bets and analyze your performance
- • Avoid emotional trading after wins or losses
- • Remember: prediction markets are not guaranteed profits
Apply Your Analysis Skills
Use our tools to analyze markets and find opportunities.