Prediction Market Glossary

Above/Below Market

A prediction market format where you bet whether a value (e.g., S&P 500 closing price, temperature) will finish above or below a specified threshold. Common on Kalshi for index and weather markets.

Arbitrage

Profiting from price differences for the same event across platforms or contracts. For example, if Kalshi prices YES at 40% and Polymarket prices YES at 50% on the same event, a trader can buy YES on Kalshi and NO on Polymarket to lock in a risk-free spread. Read more: Arbitrage guide →

Binary Market

A market with exactly two outcomes: YES or NO. The contract pays $1 if the event occurs and $0 if it doesn't. Most prediction market contracts are binary.

CFTC Regulation

The Commodity Futures Trading Commission (CFTC) regulates event contracts in the United States. Platforms like Kalshi operate as CFTC-regulated Designated Contract Markets (DCMs), making them legal for US residents. Read more: Is Kalshi legal? →

Circuit Breaker

An automatic mechanism that pauses or halts trading when prices move beyond set limits in a short period. Used by some platforms and trading bots to prevent excessive losses during volatile events.

Convergence

The tendency of prediction market prices to move toward their final settlement value as the event approaches. Traders exploit convergence by buying underpriced contracts early and selling as the price corrects.

Daily Loss Limit

A risk management rule that caps the maximum amount a trader can lose in a single day. Once hit, no new positions are opened until the next trading session.

Event Contract

A financial contract that pays out based on the outcome of a real-world event. Prediction markets trade event contracts on topics ranging from elections and economic data to weather and sports. Read more: What are event contracts? →

Exit Strategy

A plan for closing a position before settlement. Because settlement win rates on speculative trades can be low, having a realistic exit path — selling to another trader at a profit — is critical for consistent returns.

Expected Value (EV)

The average outcome of a trade if repeated many times. Calculated as (probability of winning x payout) minus (probability of losing x loss). Positive EV trades are profitable over the long run.

Fill Price

The actual price at which your order executes. On thin markets, the fill price may differ from the quoted price due to slippage — especially on large orders or illiquid contracts.

Hedge

A position taken to offset risk from another position. For example, if you hold YES on "Will Bitcoin hit $100K?", you might buy NO on a correlated market to reduce downside exposure.

Implied Probability

The probability of an event occurring as derived from the market price. A YES contract trading at $0.65 implies a 65% probability. This is the market's consensus forecast. Read more: How to calculate implied probability →

Kelly Criterion

A mathematical formula for optimal bet sizing. It tells you what fraction of your bankroll to risk based on your edge and the odds offered. Widely used by professional traders and gamblers. Read more: Kelly criterion guide →

Limit Order

An order to buy or sell a contract at a specific price or better. Unlike market orders that execute immediately at the best available price, limit orders only fill when the market reaches your price.

Liquidity

How easily you can buy or sell a contract without significantly moving the price. High-liquidity markets have tight bid-ask spreads and deep order books. Low liquidity means you may struggle to exit positions.

Live Trading

Trading with real money on a prediction market platform, as opposed to paper trading or backtesting. Live trading introduces real execution risks like slippage, fees, and emotional decision-making.

Market Maker

A trader or algorithm that provides liquidity by continuously posting both buy and sell orders. Market makers profit from the bid-ask spread but take on inventory risk. On fee-heavy platforms, market making is often unprofitable for retail traders.

Order Book

The list of all outstanding buy (bid) and sell (ask) orders for a contract. The order book shows available liquidity at each price level and determines what price you'll get when you trade.

Overround

The total implied probability across all outcomes exceeding 100%. For a binary market, if YES is priced at 55% and NO at 50%, the overround is 5%. This margin represents the platform's built-in edge or fee structure.

Paper Trading

Simulated trading without real money. Useful for testing strategies and learning platform mechanics before risking capital.

Portfolio Exposure

The total amount of capital at risk across all open positions. Managing portfolio exposure prevents overconcentration in correlated markets.

Position Sizing

Determining how much capital to allocate to each trade. Proper position sizing — often guided by the Kelly criterion — prevents catastrophic losses from any single trade.

Prediction Market

A financial exchange where participants trade contracts on the outcomes of future events. Prices reflect the crowd's aggregate probability estimate. Used for politics, economics, sports, crypto, and more. Read more: What are prediction markets? →

Prediction Market Fees

Costs charged by platforms for trading. Kalshi charges per-contract fees on both entry and exit. Polymarket charges no trading fees but has blockchain gas costs. Fees significantly impact profitability, especially on low-margin trades. Read more: Kalshi fees explained →

Range Market

A prediction market format where you bet on a value falling within a specific range. For example, "Will the S&P 500 close between 5,800 and 5,850?" Range markets are common for financial indices and economic data.

Settlement

The process of resolving a prediction market contract after the event occurs. Winning contracts pay out $1.00, losing contracts pay $0. Settlement is based on the official outcome as determined by the platform's resolution source.

Spread

The difference between the best bid (highest buy price) and best ask (lowest sell price). Tight spreads indicate liquid markets. Wide spreads mean higher trading costs and difficulty entering or exiting positions.

Stop Loss

An order that automatically closes a position when the price moves against you by a specified amount. Helps limit downside but may trigger prematurely in volatile markets.

Time Decay

The erosion of a contract's value as its expiry approaches, particularly for contracts priced far from settlement thresholds. Similar to options theta decay — the less time remaining, the less uncertainty exists.

Yes/No Contract

The standard prediction market instrument. A YES contract pays $1 if the event occurs; a NO contract pays $1 if it doesn't. Buying YES at $0.30 means you risk $0.30 to potentially profit $0.70. Read more: Understanding event contract pricing →