"Have you considered systematically trading the prediction markets?"
By Dave Mabe
Here's a question from Paul (name used with permission, edited lightly for clarity):
Paul:
I'm interested in applying automated AI systems to the nascent but growing prediction markets like Polymarket. Have you considered applying your trading mindset and systems to creating automated trading bots in this arena? I do believe there is enough early inefficiency there that it could be a bit of a gold rush for the next year or even several years, for the right systems.
Dave:
I love prediction markets, and I think we should have allowed them a long time ago.
As economist Alex Tabarrak says, "Betting is a tax on bullsh*t."
I also think it's very likely that there is some trading edge in these new markets.
In fact, I have made some select bets in recent presidential elections that have turned out well.
But there's one main reason I'm not focusing on prediction markets right now.
It comes down to a phrase you've probably heard me say many times.
What's the path to confidence with a strategy that trades the prediction markets?
There's a ceiling to how much confidence I feel like I can achieve with a strategy that doesn't have a lot of historical data to backtest on.
One of the first questions I ask traders I coach is "Are you trading your strategy with full size? And if not, why not?"
It's easy to trade stocks (or prediction markets) with relatively trivial size.
But to trade with meaningful size, you need to have a path to confidence.
The lack of historical data for prediction markets is the roadblock standing in the way of that.
Creating your own path to confidence is just easier in trading financial instruments, and specifically U.S. equities.
Great question, Paul, and thanks for sharing with the group.
-Dave
P.S. Do you wish you had more confidence in your trading, so you can trade with bigger size? Create your own path to confidence with MabeKit.