A Brief Introduction to Polymarket and Prediction Markets
To understand how Polymarket’s trading probabilities are calculated, you first need to have a basic understanding of how prediction markets work and what they offer. With that in mind, here are some of the key points to remember before you attempt to use the Polymarket app or a similar prediction trading platform:
- Prediction markets let you forecast the outcome of real-world events. You can make predictions on everything from individual sports games to climate and weather events, all by buying (or selling) derivatives contracts.
- Most prediction markets use an easy-to-follow “Yes” or “No” event trading format. You simply purchase “Yes” contracts if you think an event is likely to happen, and “No” if you don’t think it will.
- Typically, winning positions are settled at $1, while losing positions are valued at $0. So, if you were to purchase 10 contracts and win, you would receive $10; you would receive nothing if you guessed wrong, while also forfeiting your initial investment sum.
That’s a very brief introduction to the world of prediction markets and how they work. If you’d like a more in-depth explanation, including real-world examples and even Polymarket fees, you can check more comprehensive Polymarket guides on this site.
How Polymarket Probabilities Are Calculated
Now that you’re semi-up to speed with the process of using prediction markets like Polymarket, let’s take a closer look at how these platforms deal with probability. After all, this holds significant sway over your potential profit and loss, while also helping you to identify the various contracts that may be worth purchasing at the opportune moment.
Price = Probability at Polymarket
That’s right – the price you see attached to each “Yes” or “No” contract at Polymarket denotes the probability of that position returning a win or loss. All contracts are priced from $0.01 to $0.99 on the platform, with the smaller figure denoting lower probability and the bigger one suggesting that an event is very likely to happen.
Let’s say a “Yes” contract was priced at $0.40; that means there is a 40% chance that it will happen. Meanwhile, if you glanced across at the “No” option, this would read $0.60, meaning this event has a 60% chance of happening.
With me so far? Essentially, all you need to know is that probability is based on the price of a contract from $0.01 to $0.99.
What Affects Probability at Polymarket?
It’s worth noting that probability is never fixed at Polymarket, and, thus, neither is the price you’ll pay for individual “Yes” or “No” derivative contracts on trading events. Prices can fall right up to the moment that a trade fully resolves, which is why Polymarket gives members the option to sell their position early should there be a marked shift (for better or worse) in the value of their assets. For example, when making Polymarket election predictions, news headlines can have a major impact on probability and pricing.
Lots of factors can affect probability and contract pricing at Polymarket, including the following:
| Incoming news and updates | Polymarket utilizes real-time data streams to ensure that its prediction market probabilities are up to date and in line with current news, alerts, and updates. For example, in sports event trading, news of a key player being written off as injured could affect the probability. |
| Expert analysis | When industry peers and experts weigh in on an upcoming event, this can have a marked impact on the probability. For example, they may touch on an issue that traders haven’t yet considered, flipping market probabilities on their head. |
| A rise or fall in trading volume | If trade volume picks up in one direction or another, this will be reflected in the price you’ll pay for each yes/no binary trading contract, and thus the probability of an event coming to fruition. |
| Collective belief behaviour | Collective belief is a powerful driver of probability at sites like Polymarket. If a group of traders believes that an event will happen, this can have a dramatic influence on probability, even if the real-world probabilities of an event actually happening are closer to 50/50. |
An Example of Polymarket Probabilities in Action
Sometimes the best way to explain a concept like prediction market probability is to provide a few examples showing how this works in action.
Let’s say you’ve bought 10 “No” contracts predicting that this will be the hottest month on record. You paid $0.40 for each contract, spending $40 in total, at a deemed probability of 40%. With March ticking along nicely, the probability remains relatively stable. But then, weather forecasters report that a heatwave is imminent, with a few days of above-average temperatures expected towards the end of the month.
At this point, you might see a shift in the per-contract price of your positions, reflecting the change in probability. After all, it’s now much more likely that March could be the hottest month on record after all.
Do you sell your position now in a bid to recoup your initial investment before it’s lost? Or do you hold your nerve and wait for the trade to settle?
That’s what makes event trading so exciting – probability can shift from one day to the next, so you need to remain mindful of all the various factors that could affect your position, while buying and selling contracts at the opportune moment.
Key Takeaways and the Pros and Cons of Polymarket Probabilities
Whether you’re making Polymarket sports predictions or forecasting the winners and losers of this year’s Academy Awards, one thing’s for certain: you can never rest on your laurels and be sure of anything as a Polymarket future event trader. News, updates, expert analysis, and collective belief can all have a big impact on your trades, so you need to identify the risks, rewards, and opportunities, buying and selling your positions at the right moment to score maximum profit.
Pros
- Probability is easy to understand at Polymarket
- Dynamic contract pricing creates a fun trading environment
- Research and planning can pay dividends
- Price = probability at Polymarket
- Possible to sell positions early
Cons
- Probability is never guaranteed
Prediction Market Probability Is Easy to Pick up for New Traders
The only thing you need to remember is that the price of a contract (out of $1) denotes the probability of an event coming to fruition. The closer the figure is to $1, the more likely it is to happen.
Trading on events at Polymarket demands a proactive approach. You can’t afford to stand back and wait for an event to resolve; monitor pricing and probability regularly to safeguard your positions, while being prepared to step in and sell your contracts prematurely if things start to slide in the wrong direction.
Always read the T&Cs carefully when using prediction market event trading tools like Polymarket, while also identifying the very real risk of losing money on these types of platforms. Ready to get your experience of using Polymarket underway? Use the links around this page to get started with the app today.
