Simple Functions
GLOSSARY/TRADING

Edge

Edge is the difference between the market price of a prediction market contract and your estimated true probability. Positive edge means you believe the contract is mispriced in your favor.

CLI:sf edges

Edge: The Core Concept

Edge is the single most important concept in prediction market trading. It's the answer to the question: "Is this contract priced wrong, and by how much?"

Calculating Edge

Edge is simple arithmetic:

Edge = Your Estimated Probability - Market Price

If you believe there's a 45% chance of a recession and the Kalshi contract trades at 28 cents, your edge is +17 percentage points on the Yes side. If the contract were trading at 55 cents, your edge would be -10 points — meaning the No side has edge.

Why Edge Matters

Without edge, you're gambling. With edge, you're investing. Every profitable prediction market strategy comes down to finding contracts where the market price diverges from reality, then systematically exploiting that divergence.

Types of Edge

  1. Informational edge: You have access to data or analysis the market hasn't priced in yet
  2. Analytical edge: You model the event more accurately than the crowd (e.g., using causal trees)
  3. Structural edge: You exploit market mechanics — cross-venue price differences, fee structures, or liquidity imbalances
  4. Temporal edge: You react faster to new information than other participants

Finding Edge Systematically

SimpleFunctions automates edge detection. The sf edges command scans hundreds of markets, compares current prices against your thesis-implied probabilities, and ranks opportunities by edge size and liquidity. This replaces the manual process of checking markets one by one.

Edge Decay

Edge is perishable. Once other traders discover the same mispricing, they trade it away. The best edges exist in the window between new information arriving and the market fully pricing it in — often minutes to hours.

Example

sf edges output for your recession thesis:

Market                          Price   Thesis  Edge    Liq
KXRECSSNBER-26                  $0.28   45%     +17pt   A
KXGDP-26Q2-TNEG                $0.18   30%     +12pt   B
KXUNRATE-26JUN-T5.0            $0.35   42%     +7pt    A
KXCPI-26MAR-T3.5               $0.52   48%     -4pt    A

Interpretation:
  KXRECSSNBER-26 has the largest edge (+17 points) with
  good liquidity (A-rated). This is the highest-priority
  trade opportunity.

  KXCPI contract has negative edge — the market agrees
  with your thesis or is more bullish than you.

Related Terms

Executable Edge

Executable edge is edge that can actually be traded — meaning the market has sufficient liquidity, tight enough spreads, and low enough fees for you to profitably capture the mispricing.

Bid-Ask Spread

The bid-ask spread is the difference between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask). It represents the cost of trading immediately.

Thesis-Implied Price

The thesis-implied price is the probability a contract should trade at according to your causal tree model. The difference between thesis-implied price and market price is your edge.

Edge Detection

Edge detection is the systematic process of scanning prediction markets to find contracts where the market price diverges from your thesis-implied fair value by more than the cost of execution.

Implied Return

Implied return is the expected profit as a percentage of capital invested, calculated from the edge and the contract price. It converts edge points into a return metric traders can compare across opportunities.

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