Prediction Markets 101

Trading on Kalshi is distilled into the simplest decision: Yes or No. Will an event happen, or won't it? The question seems clear and easy to answer – but there are important risks to understand before you jump into a trading spree.

You should think of your trading on Kalshi like a business model. Before you start trading, it is useful to answer some basic questions that will define your trading strategy:

• What markets will I trade, and why?
• How much capital can I responsibly risk?
• When do I trade?
• What do I do when trades go well?
• What do I do when trades go poorly?
• When do I close my positions, take a break, or stop trading?

Every person and every trading strategy is different. But these basic questions should guide you to figure out the following overall strategy points before you start:

• Which markets you may have an information edge on
• Goals for profits and price exits
• The amount of funds you are comfortable trading
• Your financial strategy (when is it time to buy, when is it time to sell, how long you are comfortable having funds tied up on a trade, etc.)
• A responsible plan for what to do with profits earned from trading
• A responsible plan for what to do when trading results in losses
• Self-imposed thresholds that might help you decide when to close positions, take a break, or stop trading for a while

So, you've figured out the basics of how you will approach trading. What comes next?

Much like a stock is the asset traded on a stock exchange, the asset traded on Kalshi is an event contract. For each market Kalshi offers, there are two sets of rules associated with determining the outcome. A smaller set of rules, the Market Rules is visible under the display of the current price points on a particular market, and the full Contract Rules are available in PDF form and linked to the Market Rules.

You should pay close attention to both sets of rules before placing your trade, and take note of any nuances contained there. For example, a market regarding whether the President will say the word "immigrant" in his next press conference might have contract rules that include important clarity about what circumstances will resolve the market to a Yes outcome. The contract may indicate that plurals of the word (here, "immigrants") would resolve to a Yes, but other related words (like "immigration") would not. The Market and Contract Rules contain highly relevant information that all traders should carefully review before taking a market position.

The outcome of an event contract cannot be known in advance, which can lead to unexpected losses. Changes in the likelihood of an underlying event may not necessarily result in a change in the price of the Event Market, which could prevent a customer from exiting a position at a profit or mitigating losses. Always trade carefully and remember – you should only trade as much capital as you can responsibly risk.

The prices of event contracts are always dependent on the market's expected probability of events occurring. That makes traditional derivative pricing models inapplicable for prediction event contracts.

Price changes are often driven by news or releases of new information, and can happen suddenly in any market. You should be prepared to track your investments closely and deploy your trading strategy as price movement occurs.

All trades on Kalshi are fully collateralized – meaning you must deposit the full amount of funds necessary to take a position in a market. What that means is that your funds will remain on the platform for the duration that you hold a position in a given market. Markets resolve at different times, depending on the terms of the underlying contract. For example, a market related to an announcement by the Federal Reserve scheduled for next week will almost certainly resolve sooner than a market turning on whether an event takes place before the end of the year. Keep in mind these varying timelines and how they may affect your trading strategy when you are taking positions.

Further, markets with significant interest indicate a high degree of liquidity in a given market. Generally, users can enter or exit positions in Kalshi markets at any time – as long as there is another user willing to take the other side of the trade. There are two clues to look for: markets with significant volume, and markets with closer spreads. First, markets with significant volume indicate heightened interest on the platform, which increases the likelihood you can find someone to take the other side of a position. Second, market spreads increase as the outcome for an event becomes more and more certain – and as that certainty develops, it becomes harder to exit a potentially losing position. Pay close attention to volume and spreads as you begin to participate in prediction markets trading.

Once you have created a strategy, picked a market, and decided on a position, the next logical question is: how much do I trade? It is important to remember a few key points employed by most traders:

• The goal is not to succeed with every trade – every trader loses on a lot of trades. Losses are inevitable in trading and controlling how much you lose is a key part of strategy. The overall goal: have less losses than wins.
• When considering how much money to put down on a trade, always consider how much you are willing to lose – and what your next step will be if you lose.
• One widely-used mitigation strategy: don't deploy all your capital on one trade. Instead, spread it out over many.

You don't need to spend all the available capital you identify for trading right now. It is sometimes good strategy to start trading with a smaller amount, develop a strategy that works for you, and slowly expand your position over time.

Your trading account is your business – and you are responsible for the risks involved. The decisions you can make before you start trading help manage your capital and mitigate your risks. Never forget to ask the following:

• What is my overall strategy?
• What are the market and contract rules?
• What is my contract thesis for this trade?
• How much am I comfortable losing?
• When do I exit?

If you can answer these questions you will be well on your way to trading prediction markets like a pro.