Part 2: Core Probability and Risk Concepts
Key Insights: Successful trading isn’t about guessing blindly what will happen next – it’s about using probability to manage risk. First, understand expected value (EV): a positive EV trade means the odds are in your favor, so over time you expect to profit. Always seek trades where your estimated probability is higher than the market’s implied probability. Use the Kelly Criterion to size your trades fractionally relative to your bankroll – it suggests trading only a small proportion of your bankroll proportional to your edge. Furthermore, set bankroll limits and stick to them; this caps your maximum loss and helps prevent risk of ruin (going broke). You must also guard against “tilt” – the emotional impulse to chase losses with bad trades – by employing strict discipline and stopping when necessary.
Basic Probability and Expected Value
Probability is the bedrock of prediction markets. Every trade is essentially a probability prediction – you are risking value on an event with some chance of occurring. The expected value (EV) of a trade measures what you stand to gain or lose on average per trade if you could repeat it many times. It’s calculated as:
In a fair 50-50 coin flip (win or lose 100 sats with equal chance), EV is zero – you’d likely only break even over the long run. But in trading, we seek positive EV – situations where the probability-adjusted payoff is in our favor.
Positive expected value (+EV) means your trade has a higher probability of being profitable than is reflected in the odds you are paying. In practical terms, a +EV trade is one where you’d profit on average if you could make that same trade many times. For example, if a contract is priced at 40 sats (implying a 40% chance) but you believe it has a 50% chance, that’s a positive EV opportunity. You’re paying for 40% odds but getting a 50% shot – over many such trades, you’d expect to come out ahead.
By contrast, a negative expected value (-EV) trade is when the probability of winning is lower than what the odds imply, meaning you’re effectively overpaying for the chance. If you consistently take -EV trades (like buying long-shot contracts that are overpriced relative to their true chances), you will lose money in the long run.
A quick rule of thumb:
Implied probability = price/100 for Glimpse contracts.
Your estimated probability = your personal belief (or model’s output).
If Your Probability > Implied Probability, then expected value is positive.
If Your Probability < Implied Probability, then expected value is negative.
Example: The market price is 30 sats (30% chance) for an outcome. If you believe the true chance is 40%, the EV of a 100 sat trade (100 sats payoff) is: 0.4 × 100 - 0.6 × 100 = 40 - 60 = -20? Actually, let’s calculate carefully: If you buy at 30 sats with a 40% chance to win 100 sats, your expected value = 0.4×100 + 0.6×0 - 30 cost = 40 - 30 = +10. A +10 sat EV on a 30 sat trade is quite good (about +33% expected return). Over many similar trades, you’d average a profit. That’s the kind of edge you want to find.
On Glimpse, identifying +EV opportunities is crucial. The Advanced Quiz explicitly tests this understanding: if you think an event is 70% likely but the market is at 50%, “your belief implies positive expected value; the market underestimates the outcome”. Always compare your odds vs. market odds.
However, remember that your goal is not to be right every time (that’s impossible), but to make good trades that will yield profits on average. Embrace the idea of expected value and avoid focusing only on individual wins or losses. Even a great trade (high +EV) can lose due to randomness – that doesn’t mean it was a bad decision. Over the long term, consistently positive EV decisions will win out.
Positive Expected Value – How to Identify It
To consistently pick positive EV trades, you should:
Do your research or modeling: Develop an informed probability estimate for the event outcome. This could involve analyzing data, reading expert opinions, or using your own judgement. The more accurate your estimated probability, the better you can judge EV.
Compare to the market price: Convert the market price to implied probability. For instance, a 62 sat price = 62% implied probability. Is your estimated chance higher or lower? If significantly higher, that’s a buy signal. If significantly lower, that’s a sell/short signal.
Account for fees: Glimpse charges a 2% fee on trades (on volume). While small, fees mean the market needs to be a bit more mispriced to overcome the cost. A razor-thin edge might be wiped out by fees, so seek a decent margin of safety in EV.
Avoid biases: Sometimes the crowd price is actually smarter, and our personal biases mislead us (we’ll cover biases in Part 4). Always ask, “Why does the market disagree? Do I know something others don’t, or am I possibly overconfident/mistaken?” If you still believe in your edge after honest reflection, then proceed.
Track outcomes: Keep a trading journal of your trades, your estimated probabilities, and outcomes. Over time, this helps you refine your estimation skills. If you consistently find that events you thought were 70% are only happening 50%, you’ll need to recalibrate.
Remember that +EV is the foundation of profitable trading. If you’re buying event contracts with no edge (or negative edge) just for the thrill, you’re not making profitable decisions and will likely lose in the long run. Glimpse wants traders to understand this: you should be placing trades where, based on evidence, you believe the odds are skewed in your favor. If you can’t articulate why a given trade has positive expected value, you may want to rethink it.
The Kelly Criterion
Once you identify a favorable trade, the next question is how much of your bankroll to risk. Trade sizing is crucial – even a positive EV strategy can lose money if you risk too much money and hit a streak of bad luck. Enter the Kelly Criterion, a formula used to determine the optimal fraction of your bankroll to risk on a positive EV trade to maximize long-term growth.
In simple terms, the Kelly criterion suggests only risking a fixed fraction of your bankroll proportional to your edge. Originally derived by John Kelly, the idea is to maximize the growth rate of your capital by balancing risk and reward. Risking too little means you grow slowly; risking too much can lead to large drawdowns or ruin.
For a trade with:
p = probability of winning (in decimal, e.g. 0.7 for 70%),
q = probability of losing = 1 - p,
b = net odds received on win (profit per $1 win).
The Kelly fraction = (p * (b+1) - 1) / b, for traditional trades. In a binary contract context where b might be (payoff/cost - 1), the formula can simplify. But rather than crunching formulas, note the intuition:
If your edge is bigger (p is much higher than implied by cost), Kelly says to risk more, but still a fraction.
If your edge is tiny, Kelly says risk very little.
If there’s no edge or negative edge, risk nothing.
Practical approach: Use a fractional Kelly for safety. Many traders use half-Kelly or quarter-Kelly to reduce risk of ruin from estimation errors. For example, if full Kelly says risk 10% of bankroll, you might trade 5% or less. This sacrifices some theoretical growth for much lower volatility.
Why Kelly? It mathematically balances the trade-off between risk and reward to maximize the log growth of your bankroll. If you risk too high a fraction, you risk wild swings that could wipe you out before your edge materializes. If you risk too low, you may be too cautious and not fully capitalize on your advantage. Kelly finds the sweet spot assuming you know the true probabilities.
However, caution: In real life, you never know the exact true probability; you only estimate it. Overestimating your edge and trading full Kelly can be disastrous. That’s why fractional Kelly is advised for most. Glimpse’s Advanced Quiz emphasizes this concept: “Kelly criterion suggests risking a small, fixed fraction of your bankroll proportional to your perceived edge” rather than going “all-in” or using impulsive trade sizes. In other words, always trade within your means and proportional to confidence.
Example: You have a 0.05 BTC (5,000,000 sats) bankroll. You see a trade priced at 0.4 (40%) that you believe has a 50% chance. Roughly speaking, your edge is 10 percentage points. Kelly might say risk ~10% of bankroll (this is a ballpark; proper calc might yield something like 8%). That would be 0.005 BTC (500,000 sats). Even if you’re quite confident, you wouldn’t risk, say, 50% of your bankroll, since that is much higher than the recommended Kelly Criterion. By risking only a modest fraction, if you’re wrong, you lose a small portion and live to trade another day; if you’re right, you grow your bankroll steadily.
Fractional Kelly trading also helps manage the risk of ruin (discussed next). By never putting too much on the line, you avoid the scenario of losing everything in one unlucky streak. The Kelly approach is essentially a formal method for that principle.
In practice on Glimpse:
Use Kelly or a similar strategy as a guide for sizing trades. If it says 4% of bankroll on a very high-confidence trade, you might actually do 2% to err on safety.
Glimpse may eventually provide calculators or guidelines, but as a trader, knowing this concept helps you independently judge how aggressive to be.
Bankroll Limits and Why They Matter
Your bankroll is the total amount of Bitcoin you’ve set aside for trading on Glimpse. A Bankroll Limit is a hard cap on how much you are willing to have at risk (open positions) at any one time. Glimpse requires every user to set a bankroll limit before trading, and enforces it automatically. This rule exists for your protection: it ensures you cannot lose more than you can afford and prevents reckless behavior.
Why it matters:
Bankroll limits prevent catastrophic loss: By capping exposure, even if every trade went wrong, the maximum you’d lose is the bankroll limit. You won’t wake up to find you’ve accidentally lost too much. For example, new traders after passing the Basic Quiz have a maximum limit of 0.05 BTC. This means at worst, one could lose 0.05 BTC in a worst-case scenario, not more.
Bankroll limits encourage discipline: Knowing you have a limit forces you to prioritize your best ideas and size positions wisely. You can’t just keep adding trades without regard; you must consider how much of your bankroll is tied up.
When you set your bankroll category (Conservative, Moderate, Aggressive, etc.), you’re effectively stating how much you’re willing to lose. You should choose this based on your personal financial situation and risk appetite – only use disposable funds that you can afford to lose entirely. Never trade with rent money or essentials. In the suitability questionnaire, Glimpse even disallows trading with borrowed or essential funds for this reason.
Example: If you choose a 0.01 BTC conservative limit (~$1,000), the system will not let you place trades that would exceed that total exposure. If you already have 0.008 BTC worth of positions open and try to place another that would bring exposure to 0.012, the order will be declined. This safeguard physically stops you from breaking your own risk rule.
Moreover, Glimpse provides warnings as you approach your limit (e.g. an alert at 80% usage). This is a good cue to either close some positions or at least be aware that you’re near your max risk. It’s a prompt to pause and evaluate.
In summary, bankroll limits matter because they enforce risk management. By respecting them and not trying to circumvent (which is prohibited, e.g. you can’t open multiple accounts to bypass limits), you greatly reduce the chance of ruin. Trading becomes more sustainable – ideally, you’re trading small portions on each idea (per Kelly or similar), and the bankroll limit is there as a backstop against human error or emotional blow-ups.
Always remember: no single trade or even series of trades should ever jeopardize your entire bankroll. If you find yourself near your limit often, consider whether you might be taking on too much risk or trading too large relative to your confidence in each trade. Longevity in trading is key – it’s better to grind out steady gains than to swing for a home run and strike out completely.
Risk of Ruin and Tilt Prevention
Even with good strategy, the emotional side of trading can be a downfall. Risk of ruin refers to the probability that you lose so much of your bankroll that you can’t recover or continue. Poor bankroll management (risking too much) or going on “tilt” (trading emotionally after losses) are common causes of ruin. Glimpse’s policies and educational focus aim to prevent these by instilling discipline.
Risk of Ruin: In probability theory, risk of ruin can be calculated given your edge and fraction trade. If you risk too high a fraction relative to your edge (or have a negative edge), eventually a losing streak can bankrupt you. The key to keeping risk of ruin low is:
Small trade sizes: As discussed, use Kelly or at most a few percent of bankroll on each trade. This way, even a string of 5-10 bad outcomes in a row (which happens!) won’t wipe you out.
Diversification: (Part 3 will cover this) – spreading trades across independent outcomes lowers variance.
Bankroll limit adherence: Don’t risk money you can’t lose. If you hit your limit, stop trading – do not deposit more in desperation.
Reevaluate edge: If you experience a lot of losses, reassess if you truly had an edge or if the market has changed. Sometimes what was profitable no longer is.
Mathematically, if you risk a fixed fraction f of bankroll each time on trades with true win probability p, your risk of ruin (with infinite horizon) can be zero if f is <= Kelly optimal (assuming positive edge). But if you overshoot, ruin becomes possible. It’s beyond our scope to delve into formulas, but the takeaway: manage f to be safe.
Tilt: “Going on tilt” is a term from poker that describes a mental state where a person becomes emotionally upset (often after a bad loss or streak of losses) and starts making irrational, impulsive trades to try to win back losses. It’s one of the most dangerous psychological traps because it leads you to abandon your strategy and risk management. When tilting, traders often:
Chase losses: e.g. doubling your risk to recover your losses (“Martingale” strategy), which can quickly escalate risk disastrously.
Make unresearched trades: jumping into positions without the usual analysis, simply out of frustration or desperation.
Ignore limits: increasing your risk by adding more funds after a loss, violating your own bankroll rules.
Tilt is basically when emotion overrides logic, and it creates a destructive cycle: loss → frustration → reckless bigger trade → even bigger loss → more frustration… often culminating in wiping out the account.
Preventing Tilt: The best offense is a good defence:
Set rules and stick to them: Decide in advance your max daily loss or max number of trades. For example, “If I lose X amount or have 3 bad trades in a row, I will stop trading for the day.” Write this down and commit to it. Glimpse encourages taking breaks – stepping away can reset your mindset.
Recognize the signs: If you feel unusually upset, find yourself wanting to “get it all back in one trade,” or notice you’re deviating from your strategy, these are red flags. Physical symptoms (racing heart, anger, despair) also hint you’re not in a rational headspace.
Use bankroll management as a guardrail: By limiting each trade to a small percentage, even a tilt impulse can’t cause huge damage in one go. Also, the platform’s limit will outright stop you if you try to wager more than you have left.
Take a break: The number one advice from professionals is to step away when tilt threatens. If you hit a point where you’re not thinking clearly, log off. Go for a walk or do something calming. The markets will be there later. It’s better to miss a potential opportunity than to create a disastrous trade in an impaired state.
Keep a trading journal: After a loss, write down what happened and how you feel. Journaling introduces reflection and can defuse some emotional spirals. Reading your own notes can remind you of long-term plans and past mistakes to avoid repeating.
Avoid “revenge trading”: After a tough loss, don’t immediately jump into a new trade just to avenge it. That’s ego, not strategy. Follow your pre-determined process for finding trades.
Life balance: Ensure you’re in a good mental and physical state while trading. Fatigue, stress from outside, or other factors can lower your emotional resilience. Only trade when you’re focused and calm.
Glimpse is proactive about tilt: if a client shows “harmful or unsustainable behaviour”, the company may intervene, in line with BMA’s consumer protection code. This could mean a temporary cooldown or contact to ensure the client is okay. Ideally, you manage yourself so it never gets to that.
Bottom line: Never trade if you are angry or desperate. The moment you sense those emotions, stop. As the saying goes, “If you lose your head, you’ll lose your wallet.” Keeping a clear mind and sticking to your risk limits will ensure you live to trade another day. Trading is a marathon, not a sprint; avoiding ruin and tilt is how you stay in the game long enough to realize the positive EV of your strategy.
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