Prediction markets are contracts with fixed risks and fixed rewards. In prediction markets, the trader must decide whether an underlying asset, such as a stock, a commodity, or a currency, will go up or down during a fixed period of time.
The prediction market works in much the same way as a roulette: if your prediction is wrong, you lose all the money you risked, but if your prediction is right, you receive your money back plus a return. A common set-up is for the trader to make 80% of what they bet on any trade that they get right. For instance, if a trader puts in $10 dollars betting on the value of the BTC/USD going up, and the guess is correct, he would receive $8 dollars plus his initial investment. If the value of the same currency drops, however, the trader loses 100% of the money that they put in.
To make money in prediction markets in the long run, you must win the majority of the bets. Since forex trading allows users to set their own profit targets vs. stop-loss orders, traders can still make a profit even if they do not win the majority of their trades.
There are of course some similarities between prediction market and forex trading. Both financial trading markets are tradable online, and they both allow users to start trading with small amounts of capital.
In both types of markets, users are speculating on which direction an asset moves in. In the case of guessing correctly, both trading options provide strong profit potential.
However, there are some differences between prediction markets and forex. In a prediction market, traders only guess whether an asset, such as a foreign currency or crypto, will go up or down in value over a fixed period of time. In this sense, there is no variability in the risk or in the profit potential. The prediction market is named after the binary system, in which the only two input options are 1 or 0. Similarly, in prediction, the only two options are up and down.
Higher variability, more risk
Forex markets offer higher variability and more risk for traders. In forex markets, sometimes known as FX markets or currency markets, traders must decide not only in which direction an asset will go, but must also predict how high or low that asset goes. Thus, the ultimate risk and profit are unknown.
In forex, there are no limits to how much money a trader can make or lose unless they use certain tools to control trading. One tool is a stop loss, which prevents traders from losing more than a certain amount. In other words, once the trader has lost a certain amount, the trade automatically closes. Similarly, the potential reward may also be fixed beforehand. The trader can decide that he wants the trade to close once it has reached a certain profit value.
The maximum loss in forex would be all the money on your trading account. In forex, both losses and profits can be managed with limit/stop orders.
Predictions operate on specific timelines. The trader has no control over when a trade begins or ends once a trade has started. Before a trade begins, users must select when the order expires. Each option has a start time and an end time.
At the expiry time, the trade automatically closes. Some brokers allow you to close early but you will exit your option at a percentage of the expected return. Not all brokers offer this option.
Similarly, some brokers allow traders to delay the expiry time to the next expiry time. This is called “rollover” and is only possible if traders increase their investment by a certain percentage.
In forex trading, users can take trades lasting from one second to many months, since they can open and close the trade whenever they feel like it. This flexibility has both advantages and disadvantages.
Forex has a tool called margins. Each broker determines the maximum margin. Margins allow traders to increase their investment capital so that they can make a larger profit if the trade is a winning one. Margin is not a tool available for prediction markets.
There are many different types of orders in forex. Buy/sell are the most important type. However, there are more advanced types such as limit, stop, OCTO (one cancels the other), trailing stop, and hedge orders, among others.
Forex trading and prediction are quite different and it is important to understand these differences in order to become a successful trader.