A fellow trader wrote to me a couple days ago asking for advice. His 1099 from PredictIt showed relatively flat growth from 2019 to 2020 and he wanted to know some tips and tricks on how to improve, whether I had ever had an “aha!” moment, what markets to look for for the most edge, and so on. So to the extent that I’m even qualified to answer these questions, here is what I did to get better and how I approach my trading. Maybe you’ll find it useful?
Step 1: Make Mistakes
When I started trading on PredictIt in May of 2016, I had zero clue what I was doing. I did not trade the stock market, I did not trade crypto, I had only a vague idea of what words like “arbitrage” or even “risk” meant. I did, however, know that there was a greater than 90% chance Hillary Clinton would be the Democratic nominee come July 2016! Free money! (Imagine my chagrin when it dipped into the mid-80s following Comey’s non-indictment press conference in June). I parked my cash, waited, and eventually made my $5 on my initial $50 bet or whatever it was.
Right away, I made some pretty basic mistakes. First, I took the website for what it said it was supposed to be. That is, I traded with the idea of making a prediction on what the final outcome would be and whether or not I thought the likelihood was higher or lower than the price the market was putting on it. (This is still how most people trade and – by the way – if you are doing this and you are right more than you’re wrong you will win money!) Second, I was just kind of generally afraid of the markets if I was uncertain of an outcome. Every time I went to place an order I’d be like “Hmm, 100 shares costs me $60, do I really want to bet $60 on this?” And then if the market moved, I’d assume it was moving for a good reason, otherwise why would it be moving? So, I’d panic-dump sometimes. And third – and this is the worst – I’d get stubborn if I initially had high confidence. I had made my prediction, damnit, and I am still right. There’s no way Obama’s job approval would fall 2 points this week! I’d often watch 89c maxes rise to 97c, fall to 85c, rise back to 93c, and then eventually win while I did nothing. Yes it would dawn on me that maybe I should try capturing the value in those market movements, but how the hell was I supposed to predict that? Instead I’d just click on the risk chart and vacillate between going starry-eyed thinking about how much I would make when my position hit or wide-eyed thinking about how much I would lose when it didn’t.
The upshot of all of this is that I wasn’t a very good trader. I broke even. I’d win lots of small wins then get one thing wrong and welp I guess we’re net down $1000 now so let’s go ahead and deposit another $100. I got pumped by the comments and panic sold in polling markets. I bought on the news in fundraising markets without understanding exactly how they resolved, then held to the bitter end just in case all the smart people in the comments were wrong (they were not). I saw all my investments in Hillary’s obvious win rise to 90c and above and held because why leave a free 10% on the table? All in all, my mindset was wrong. I was trying to be a perfectionist that always gets a dollar for each of his winning shares. I was trying to be right. Don’t try to be right. Try to earn. There’s a big difference.
Step 2: Learn from the mistakes
I never had an “aha!” moment when it came to figuring out how to consistently earn on PredictIt. It was more of an “oh shit” terror. It was Wednesday, November 9, 2016. Trump had just been elected and I was numb and pissed at myself. Here I had spent god knows how much time on this website and instead of selling while I was up, I had let it ride and found myself $2500 lighter in the aftermath. My overall portfolio had gone from +$8500 to +$6000 or so. And I decided in my disgust that I was going to withdraw everything but my profits plus a little bit (so I could at least say that I hadn’t lost money doing this). I was left with about $775 and we would just see how long I could make it last. (I’d deposit once more: $125 in December 2016 and then that was it. I haven’t deposited since.)
I found myself with about $1600 in winnings on my 2016 1099, and this is what that year looked like:
My political gambling story likely would have ended with election day 2016 if it hadn’t been for one fortuitous development around the same time: I found myself in a group chat with a bunch of actually good traders. These were veterans of the polling markets where I had found a niche as “the guy who analyzes the day-to-day data for the USC tracking poll”. I started sharing information with them and they with me, and eventually was recruited to help track election day returns in various states. The goal was each person would pay attention to a different state and that together, we’d perform better than apart. The result was that we all were drinking and commiserating while Trump was on his way to winning and PI was completely unusable. But of course the real result was that we formed friendships and, for me, I gained some trading role models. Just listening to them talk through their positions openly (without the caginess that comes with public posts on the message boards) was invaluable. You could sell before the market expired! You could buy cheap stuff with lots of upside even if there wasn’t a clear path to victory for them! I know this isn’t rocket science (and it definitely isn’t neuroscience) but it turns out that you can learn from other people and that bouncing ideas off friends is actually pretty valuable. I recommend it!
Things eventually got better for me, as you can see from this plot of all the years since that newbie first:
Step 3: The actual lessons learned
And now here is a list in no particular order of things I have picked up over the years:
–Know why you’re betting. If it’s just for fun, it’s just for fun! Stop reading this blog and go back to the fun. There is no reason for political betting to become a time-consuming part of your life! You can keep it completely casual and just show up on election nights like you would show up to bet on the Super Bowl. If you’re getting sucked in though, acknowledge that and try to see it clearly. I eventually decided that if I was going to do this, I might as well do it right. That meant forgetting about “committing” to a position. If my mind can change, so could my investment. My goal as a trader now isn’t to be the best predictor, to have the best record of picks made far out in advance. My goal now is much simpler: earn.
-Don’t get into a position you don’t have a plan to get out of. This, like a lot of the advice I’ll give, sounds pretty obvious. And yet…. many of you don’t do this. Here’s what I mean. It’s the end of January 2021 right now, so let’s say you’re about to bet whether Trump is convicted in his upcoming Senate trial. You think he won’t be, because everyone is saying there aren’t the votes for it. You buy NO, and your “exit strategy” is to wait until you are paid for your shares at a dollar. This is okay! But we could imagine fledging it out a bit more. PredictIt limits the number of share you can buy via its $850 cap. So if the price falls below your entry, you could have gotten a bigger number of shares to hold to the conclusion. Well that would be annoying, but what does this have to do with an exit strategy? Okay let’s keep going. What would cause the market to move substantially toward YES? Well, there could be news that breaks before or during the trial. A Senator thought to be borderline could change their mind. Potential upwards price movements could be small or they could be large, all depending on the event. And, if that big news does happen (some witness testifying that Trump was on the phone with rioters in the building or something – extremely unlikely), you’d probably want to sell your upper 80s NO shares for real! So maybe we can tack on some additional offramps to your position. Some of these might be real (“oh god, what if this does happen?”) and some might be strategic (“this won’t affect the outcome, but other people might think so, and I can rebuy at a cheaper price”). In the end, you may decide that nothing dramatic will happen, the YES price will rise slowly over time, and therefore you do just end up holding for the dollar. But in fleshing out your thoughts on what could have happened, you were more prepared as a trader. If those YES-spiking events had happened, you would have been ready to respond. And – and this is the biggest point – just the act of thinking a bit more deeply about the question has likely given you a better understanding of the issue in general. It’s a good habit to get into!
–Don’t marry your position and don’t marry your plan either. Political betting is not the realm for long-term commitments. Stuff happens, things change, your plans will be thwarted, your positions will get blown up. When something breaks against you and your holdings are underwater and sinking, sometimes you have to cut bait. Stubbornness is your enemy. (So is panic, but we’ll get to that later). If you’re the type of person that gets really mad when the weather ruins your picnic or in general cannot accept that sometimes shit goes awry… you will be crushed in political betting. Stay away. You need to be flexible. You need to be able to accept that sometimes your initial prediction was just wrong. Maybe you missed a key piece of the puzzle. Maybe your reasoning was flawed. Maybe you really did get unlucky. Maybe when you bet on Trump pardoning himself, sometimes it turns out that report after report suggesting he’s not going to do it means that said pardon really might not happen and that even if it happens in secret it probably won’t show up on the official website and that maybe it’s time to admit your position really IS underwater for valid reasons and that maybe you ought to salvage what you can rather than just holding it to the bitter end (hi Zoltar).
-Don’t panic (and carry a towel). You’re going to panic sometimes. Your shit is underwater, perhaps suddenly, you don’t know why, everyone is typing “GG” in the comments, oh god oh god and I’ve sold and why is it rebounding and I’ve bought back in and oh no it’s falling again I hate myself. We’ve been there. How do we minimize these situations? Here are some things I do to avoid panics: if the price isn’t going to move from where it is for a while, just sell. You can always buy back in later and you avoid surprises in the interim. If you don’t know a lot about the market (what factors are at play, how to identify when something has changed that influences one of these factors, etc) then you’re much more likely to get caught completely clueless about a sudden price move that puts you underwater. But if you DO know how the market works, you’re more likely to be in a position to recognize when a market is reacting appropriately and when it is overreacting (it’s almost always overreacting). So learn the market! (See immediately below)
-Do some work. Like, not even that much! Read the rules of the market before you buy, for instance. Google stuff you don’t know. Ask yourself the “what if” questions, then google around for the answers. Does the market move before you see the news yourself? Figure out how to get the news faster. Build a spreadsheet (let’s say to track which Senator has voted in which way during a vote count market). If you want “edge” in a market all you have to do is go out there and get it. Remember if other people seem to understand what’s going on, then so can you, and that’s it’s probably easier than you think. Also, solving the puzzle of a market is actually pretty fun!
-Pay attention to yourself. Did you buy 85c NO shares in something safe, then dump them when the market moved to 75c on some pump that you didn’t really understand but that seemed sort of plausible and you were down $85 and oh god what if I lose it all? That’s fine, it happens. But if you made that move for that reason, probably other people did too. Which means the next time you’re in a “safe” market and some similar kind of halfway nebulous pump emerges, you’ll know what might be about to happen, and you can exploit it either by getting out early, or by hopping along for the ride. Unless you’re full Kefka – a guy who bet on tweets purely based on hurricane severity – the chances are pretty good that whatever thought process you have is shared by many other traders. Learn thyself to learn the markets.
-Keep track of how you’re doing. A lot of traders don’t really track their progress. And you don’t even need that much in spreadsheet skills! Let me walk you through the basics. If you’re downloading your history from PredictIt, you can open that sheet in excel or paste it into google sheets, and somewhere off to the side you can type “=SUM(G:G)+sum(H:H)”. This is the sum of the profit/loss column + the sum of the fees column. Why do we add fees? Well, because fees are represented by negative numbers, so in effect you’re subtracting them. The result? Your profit less fees! As realized, not accounting for withdrawals (multiple by 0.95 to see this) nor taxes (up to you how to compute, but just ignore this for now). I may be alone among most of the long-time semipros, but I barely look at my dashboard showing the current value of my portfolio. Who cares! What matters is what gets realized, so focus on that.
Okay: next step. Let’s calculate your fee ratio. Your fee ratio is the the ratio of the fees you’ve paid to the raw gains (before fees) that you’ve realized. (This is a great way to compare yourself to other traders, by the way, since it ignores portfolio size and so on). The formula here is “=-SUM(H:H)/SUM(G:G)”. I like to express it as a percentage and just slap a -100* at the front instead (the negative sign is there again to account for fees being represented by negative numbers). If your fee ratio is 10%, congrats. You are perfection incarnate, because PredictIt’s fees are 10% of profits. If your fee ratio is 50%, on the other hand, you have some work to do. Get it as low as possible – for reference my fee ratio for January 2021 is 12.5%; by contrast my fee ratio for all of 2016 was 56.2% (that’s right, my fees were greater than my profit after fees. This is bad.). Once your fee ratio is low, the next step is to keep it low while increasing the volume you trade. More shares being traded more profitably = more money (you want money). [Sidenote here after some discussion on twitter: you can be a great trader with a fee ratio of 12.5 or 15 or 20 or 25 or even 30… but you can’t be one if you’re over 50! The point of checking in on this is to see if your losses are hurting you more than you think. If you want some non-mathy advice: whenever you lose money, ask yourself what it is you could have done to avoid it. Sell earlier? Not enter at the price you did? There will always be some improvement you can make!]
Fifteen More Tips and Tricks
The other little things that I thought of and didn’t fit above:
- When deciding where to place an open buy or sell offer, ask yourself “at what price would I definitely buy/sell the other way on this?”
- If you’re making a short-term play, subtract 2c from your sell target just to make sure it gets hit.
- The market will always be a bit stupider than you think, even when you try to imagine it being stupider than you think. Think about it.
- You can always do more. Found the fastest stream to watch congress vote? Gotten yourself onto the WhiteHouse press mailing list? Posed as a freelance journalist and called a random state park in Indiana (eventually speaking to the general counsel of the state park system) to ask if Mike Pence had an event there because despite nothing on his schedule, the FAA had placed an air space restriction over the area according to coordinates entered into Google maps? (In November 2016, one PI trader legendarily got an entire market resolved in his favor by recording a call to the RNC and sweet-talking a receptionist into telling him that, indeed, Reince Priebus had resigned as head of the RNC already to take the COS job).
- If you’re going to sell when your position falls 5c underwater, then don’t sweat the purchase price. You’re not investing $80 for 100 shares at 80c. You’re investing $5, because that’s how much you’ll lose if you stick to your plan to sell at $75 if things go awry. Note: sometimes your plans will also fail (see above).
- You can always buy back later. Already said this above, but it really is good to keep in mind. Sure, your 85c shares are worth a dollar. But the market is at 90c and it’s not going to move for a few weeks so might as well just collect and rebuy later – who knows, you might be able to get back in cheaper or avoid getting destroyed by something you didn’t foresee.
- Buy a second monitor. What are you doing with just one to begin with? They don’t cost much and it’ll pay for itself in no time. Slap tweetdeck over on that bad boy with about four columns of relevant stuff in it and you’ve got yourself a handy-dandy info stream just a glance away. You would be shocked how easy it is to be the first to scoop a market on breaking news this way.
- Volatility is fun! I swear. Try trading just 10 shares at a time during volatile markets if you’re scared at first.
- If a market has been sitting at 95c for a while and something happens to perturb it, you will see a much larger panic than you would expect. The people who buy “sure things” are always the people who panic the hardest when things move against them. And the people who buy lotto tickets are always the ones who hold way too long when their stuff goes up.
- Beware the degenerate’s paradox: the only way to get an absurd winning position is often to be the kind of person who takes lots of absurd positions and ends up losing on a bunch of them that don’t get shared as screenshots in the comment section. It’s true that you only live once, but that doesn’t mean you have to YOLO everything all the time. Sometimes it works though!
- If you’re ever feeling really torn about selling a position, remember that you don’t always have to sell the entirety of your position at once. Sell 10% and see if you feel better or worse.
- Profit is good (it turns out). You should take it, even if it’s just a little bit at a time. Yes, you will be afflicted with horrible, stare-at-the-ceiling-in-bed, soul-crushing “why did I do that” about the time you sold too early and it would have been tens of thousands but I mean such is life. You also don’t want to be like a famous trader I know who took an Elizabeth Warren 8c max on a round trip up to 57c and back to 11c before selling. Even that $GME dude on r/wallstreetbets who turned $50k into a $50M position took some profit on the way up.
- If your position’s value in a multi-bracket market adds up to a dollar across all the YES shares you own…. sell. What are you doing? This is particularly true in a vote-count market like we’ve had recently on various cabinet nominees. Shit, if you can get 75-80c before the vote even happens I’d just take that and then bank on collecting more during the vote itself when things are at maximum fun (see number 8).
- It’s okay not to have a position. You would be amazed how many opportunities you miss by always having a position in a market versus being able to react as appropriate to the news. Sometimes, it’s best to be on the sidelines.
- You don’t need to stick your neck under a guillotine in order to feel alive. Is there an event, like the HELP committee scheduling hearings for Cardona/Walsh that could suddenly destroy half the value of your NO position on their pre-March confirmation? Being at risk to sudden blows or insta-death can be exhilarating, I guess, but also I mean see number 12.
Hopefully all of this is remotely useful; again I don’t claim to be the best political bettor out there and there are plenty of soft spots in my game. But I do win, at least! Good luck out there, and if you ever have questions about stuff you can always hit me up on twitter.