Evaluating stop and target bounds before fading large moves

Bounds are locked before entry

A complete fade of a large move is specified before entry by pairing a Stop-loss order of size V with a profit limit of size W, so only those two bounded outcomes remain.

Win probability depends only on the ratio

With those fixed sizes, the long-run win probability of the fade is V/(W+V) and the complementary loss probability is W/(W+V).

That win probability depends only on the risk-to-reward ratio V/W: equal stop and target imply even odds, while a larger stop reduces the chance of being stopped out.

Profit expectancy stays at zero

Substituting those probabilities into Expected value with fixed win W and loss V yields profit expectancy of zero.

Because expectancy is unchanged, a trader can choose stop and target sizes that shrink drawdowns without changing overall profit expectancy.

Large moves as a distinct exposure class

Large moves are defined by height far above the largest pullback, so they present large reward-to-risk ratios and must be sized as a distinct exposure class.

The probability that a market move is at least n times as large as its largest pullback is exp(-n+1). As an illustration, almost two of 100 moves are at least five times that pullback.

Closed form without a path simulation

A stepwise Expected value argument, and its zero-step-size limit, recovers the same closed-form win and loss probabilities without requiring a path simulation.