From Spread to Profitability: How Much Edge Do You Need
The key question
Most traders ask: is my prediction correct. The better question is: is my prediction profitable after costs.
To be profitable, your expected edge must exceed your total trading friction, especially all in cost and round trip cost.
What edge means in a prediction market
In binary prediction markets, prices are often interpreted as implied probability.
Your edge is the difference between your estimated true probability and the market price. If you buy YES at 52c, you are effectively paying 52 percent implied probability.
Costs you must beat
There are two cost layers:
• execution cost: spread, slippage, impact, measured best by effective spread
• fees: charged by the venue
Combine them into all in cost.
Minimum edge logic (simple)
If you plan to enter and later exit, use round trip cost.
Minimum edge approximately equals:
• round trip all in cost, expressed in the same units as price
If your edge is smaller than your cost, you are trading negative expected value.
Example: estimating minimum edge
Suppose typical conditions in a market:
• quoted spread is 4c
• your realized effective spread is 5c one way
• fees are 0.7c one way
One way all in cost = 5.0c + 0.7c = 5.7c
Round trip all in cost = 11.4c
If your expected edge is 6c, you are not beating costs. You need an edge larger than about 11.4c to make the trade positive EV under these conditions.
Entry only strategies and holding to settlement
If you hold to settlement and do not exit, your cost profile changes:
• you pay costs on entry
• you may not pay exit costs if you settle instead of selling
In that case, you compare your edge to one way all in cost, not round trip cost.
But holding to settlement creates other risks: time, capital lock, and uncertainty about when you might need to exit.
Why traders underestimate the needed edge
Common reasons:
• using quoted spread instead of realized execution metrics
• ignoring slippage and impact
• ignoring exit costs
• assuming liquidity will be the same later
• ignoring fees and maker taker differences
Practical rules
Rule 1: If you cannot estimate round trip cost, trade smaller or avoid thin markets.
Rule 2: If your edge is not at least 2x your one way cost, you have no margin for error.
Rule 3: If you rely on exits, assume exit costs can be worse than entry.
Rule 4: Measure realized costs by market and by time. Costs are not stable.
Takeaway
Being right is not enough. You need enough edge to survive the spread, slippage, impact, and fees. In prediction markets, the minimum required edge is often much larger than new traders expect, especially in thin markets.
Related
• All In Cost: Spread, Slippage, and Fees in One Number
• Round Trip Cost: What It Really Costs to Enter and Exit