The Null Hypothesis
The default assumption should be that you have no edge. The burden of proof is on demonstrating that your results are statistically unlikely to have occurred by chance. This is the same framework used in scientific research: start with the null hypothesis (no effect) and look for evidence to reject it.
Minimum Sample Size
For a binary outcome strategy (like prediction market trading), you need roughly 100-200 resolved positions to distinguish a 55% hit rate from 50% with reasonable confidence. For continuous return strategies (like momentum trading in crypto), you need roughly 50-100 trades to assess whether risk-adjusted returns are significantly positive. Fewer trades than these minimums cannot provide statistical confidence, regardless of how good the results look.
The Right Benchmarks
For prediction market trading, the benchmark is the market price at entry. If you consistently buy contracts below their resolution value and sell above, you have demonstrated probability assessment skill. For directional trading, the benchmark is buy-and-hold of the same asset class. If your active trading produces better risk-adjusted returns than passive exposure, your trading adds value.
Beware of Favorable Conditions
A strategy tested during a strong bull market will show positive results even without any edge, because everything goes up. Evaluating edge requires testing across market conditions, including the unfavorable ones. If your strategy is profitable during bull markets but loses during bear markets, you might not have an edge at all. You might just have long-biased exposure.
The Honest Assessment
After 200+ trades, calculate your actual hit rate, average win to average loss ratio, and risk-adjusted return. Compare against the null hypothesis of random trading and against the benchmark of passive exposure. If your results are statistically significantly better than both, you likely have a genuine edge. If they are not, you have two options: develop better analytical methods, or accept that your comparative advantage might lie outside active trading and allocate your capital accordingly.
This honest self-assessment is uncomfortable but invaluable. It prevents you from spending years and capital on an activity where you do not have a genuine advantage, and redirects your efforts toward areas where you do.
Explore these tools on Blockcircle: Prediction Markets Mispricing Engine | Momentum Trading Engine