Fair Price and Edge: Turning Beliefs into Trade Thresholds
Forecast vs trade
Your predicted probability is your belief about the world. A trade is a decision under costs and imperfect execution. The bridge between the two is fair price and edge.
What fair price means
Fair price is the price you would be willing to pay if there were no fees and no execution frictions. In many prediction markets, a YES contract pays 1 at settlement if the outcome happens, and 0 if it does not.
Under that common payoff, the clean conversion is:
• fair price (0 to 1 scale) = predicted probability
• fair price (0 to 100 scale) = 100 times predicted probability
Before converting anything, confirm the price scale.
What edge means
Edge is the gap between your predicted probability and the market's implied probability. If the market implies 55 percent and you believe 60 percent, you have a 5 point edge in probability terms.
How to compute it:
• implied probability = convert market price into implied probability
• edge = predicted probability minus implied probability
Edge is not profit. It is raw advantage before costs.
Use quotes, not just last trade
Market price is not one number. You face different prices to buy vs sell:
• to buy YES, you usually pay the ask
• to sell YES, you usually hit the bid
The difference is the bid ask spread. The mid price is a useful reference, but you do not automatically get filled at mid.
Edge that matters is edge after costs
Costs turn a small edge into no edge. The common costs in prediction markets are:
• fees and trading fee
• spread cost from crossing the bid ask spread
• slippage when you try to trade size in thin liquidity
That is why you need a minimum edge threshold, not just any positive edge.
Break-even probability is your threshold
Break-even probability is the probability you must have for a trade to be zero EV after costs. If your predicted probability is below break even, you should not take the trade.
This is the clean mental model:
• predicted probability must exceed break-even probability
Then your edge is not just positive, it is large enough to survive costs.
Worked example: setting a buy threshold
Suppose the market shows:
• bid 54, ask 56 (on a 0 to 100 scale)
So the implied probability is roughly 0.56 if you want to buy now at the ask.
You estimate:
• predicted probability = 0.62
Raw edge vs ask implied probability:
• edge = 0.62 minus 0.56 = 0.06 (6 points)
Now subtract costs conceptually:
• fees and spread mean your break-even probability might be closer to 0.58 or 0.59, depending on the platform and how you execute
If your predicted probability is still above break even, the trade can make sense. If it is not, the edge is fake.
Expected value connection
Expected value is the scorecard for trades. A clean way to think about it is:
• EV rises as predicted probability exceeds implied probability
• EV falls as fees, spread, and slippage rise
If you want the full cost math, see the guide on EV and break even.
Common mistakes
Using mid price as your execution price: if you buy at ask, mid is not your cost. Quotes matter.
Treating any edge as tradable: small edges often do not clear fees and spread.
Skipping the scale check: if you mix 0-1 and 0-100, you create false thresholds.
Forgetting exit costs: if you plan to exit early, you may pay the spread twice.
Takeaway
Fair price turns predicted probability into a price target. Edge tells you how far the market is from your belief. But the only edge that matters is edge after costs. Use bid and ask quotes, compute edge versus the price you can actually trade, and require that your predicted probability clears break-even probability.
Related
• Market Price to Implied Probability: Avoiding 100x Errors
• Expected Value and Break-even Probability: Costs Turn Beliefs into Math